The 'Seller's Put' and Deal Terms in Corporate Mergers and Acquisitions
69 Pages Posted: 20 Nov 2011 Last revised: 1 Feb 2017
Date Written: January 30, 2017
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: Suggested Citation