Why Are Bidder Termination Provisions Included In Takeovers?

We present a rationale for bidder termination provisions that considers their effect on bidders' and targets’ joint takeover gains. The provision’s inclusion can create value by enabling termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This trade-off explains why the provision is included in only some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

Keywords: Mergers and Acquisitions, Takeovers, Termination Fees

JEL Classification: G13, G34, K22

Suggested Citation: Suggested Citation

Chen, Zhiyao and Mahmudi, Hamed and Virani, Aazam and Zhao, Xiaofei, Why Are Bidder Termination Provisions Included In Takeovers? (August 1, 2020). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=2138979 or http://dx.doi.org/10.2139/ssrn.2138979