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Using Option Prices to Infer Overpayments and Synergies in M&A Transactions

47 Pages Posted: 12 Oct 2011 Last revised: 12 Dec 2012

Kathryn Barraclough

Vanderbilt University - Finance

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Tom Smith

University of Queensland; Financial Research Network (FIRN)

Robert E. Whaley

Vanderbilt University - Finance

Date Written: October 11, 2011

Abstract

In this paper, we use call option prices to identify synergies and news from merger and acquisition (M&A) transaction announcements. We find that M&A announcements result in large and approximately equal gains to the bidder and the target on average, with the combined gains being large enough to justify the premium paid to target shareholders. On average, M&A announcements release good news about targets, but bad news about bidders. This suggests that market prices understate true synergy gains, and helps reconcile the generally negative market-based evidence on value-creation in takeovers with their continued prominence in everyday business strategy.

Keywords: takeover offers, option-implied values for bidder and target gains and news

JEL Classification: G30, G34, C51

Suggested Citation

Barraclough, Kathryn and Robinson, David T. and Smith, Tom and Whaley, Robert E., Using Option Prices to Infer Overpayments and Synergies in M&A Transactions (October 11, 2011). Vanderbilt Owen Graduate School of Management Research Paper No. 2012-02. Available at SSRN: https://ssrn.com/abstract=1942231 or http://dx.doi.org/10.2139/ssrn.1942231

Kathryn Barraclough

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Tom M. Smith

University of Queensland ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert E. Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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