The 'Seller's Put' and Deal Terms in Corporate Mergers and Acquisitions

69 Pages Posted: 20 Nov 2011 Last revised: 1 Feb 2017

See all articles by Vineet Bhagwat

Vineet Bhagwat

George Washington University - Department of Finance

Robert A. Dam

University of Colorado at Boulder - Department of Finance

Date Written: January 30, 2017

Abstract

We provide novel evidence of an economically significant “seller's put” implied in M&A deals. Sellers maintain extensive legal rights to walk away from an initial deal – presumably when their value increases – while bidders are more constrained in their ability to withdraw. We model M&A deals with interim risk, and empirically test hypotheses that assess the degree of asymmetry therein. We find that renegotiations and terminations strongly favor the target, and estimate the bidder's unobserved costs of reneging to be four times greater than the target's. Furthermore, we find large effects on the bid premium, break-up fee, method of payment, and time to close, all consistent with the theory and rational responses by both parties to the implied costs of the “seller's put.” We estimate the option to be worth 2 percent of deal value in a typical cash tender, and 6 percent in an average stock deal.

Keywords: mergers and acquisitions, method of payment, legal restrictions, deal convention, stock price correlation

JEL Classification: G34, G30, K22

Suggested Citation

Bhagwat, Vineet and Dam, Robert A., The 'Seller's Put' and Deal Terms in Corporate Mergers and Acquisitions (January 30, 2017). Available at SSRN: https://ssrn.com/abstract=1961846 or http://dx.doi.org/10.2139/ssrn.1961846

Vineet Bhagwat (Contact Author)

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Robert A. Dam

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-2289 (Phone)

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