Shareholder wealth effects of M&A withdrawals

Abstract

This paper provides evidence on the wealth effect in the event of the withdrawal of a merger or acquisition, and the impact of termination fee provisions on acquirer withdrawal returns. I report a significant negative correlation between acquirer withdrawal returns and announcement returns, consistent with the theory of managerial learning in M&As. Target firms reap net gains in deal withdrawals, showing evidence of a permanent revaluation of targets even if the deals fail. I also find that acquirer termination fee provisions are positively associated with acquirer withdrawal returns, suggesting that such provisions may play a disciplinary role in the withdrawal decision-making and protect acquirer shareholders' interests in deal withdrawals. Furthermore, my results also show that target termination fee provisions are negatively associated with acquirer withdrawal returns, which supports the efficiency hypothesis.

Why do some merger and acquisitions deals fail? A global perspective

“…The business world witnessed over 50,000 mergers and acquisitions (M&A) transactions worldwide only in 2018, with the total value of over 3.9 trillion U.S. dollars (The Institute of Mergers, Acquisitions and Alliances). A burgeoning academic literature highlights the importance of deciding on M&As in affecting corporate restructuring, efficiency, performance, and growth (see e.g., Caiazza & Pozzolo, 2016; Liu, 2019; Renneboog & Vansteenkiste, 2019). The decision makers in these M&A deals assess substantial information (e.g., financial recommendations, sunk costs, revaluations, country characteristics, termination fee, negotiation criteria, and expected synergies) either to complete or withdraw a deal during the negotiation process.…”