Using Option Prices to Infer Overpayments and Synergies in M&A Transactions
47 Pages Posted: 12 Oct 2011 Last revised: 12 Dec 2012
Date Written: October 11, 2011
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: Suggested Citation