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How Much is Too Much: Are Merger Premiums Too High?

20 Pages Posted: 12 Mar 2008  

Antonios Antoniou

Wealth Associates

Philippe Arbour

Lloyds TSB Corporate Markets

Huainan Zhao

Loughborough University - School of Business and Economics

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Abstract

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long-run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long-run post merger underperformance.

Suggested Citation

Antoniou, Antonios and Arbour, Philippe and Zhao, Huainan, How Much is Too Much: Are Merger Premiums Too High?. European Financial Management, Vol. 14, Issue 2, pp. 268-287, March 2008. Available at SSRN: https://ssrn.com/abstract=1104842 or http://dx.doi.org/10.1111/j.1468-036X.2007.00404.x

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Philippe Arbour

Lloyds TSB Corporate Markets ( email )

London
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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