Why Are Bidder Termination Provisions Included In Takeovers?

44 Pages Posted: 31 Aug 2012 Last revised: 20 Mar 2020

See all articles by Zhiyao Chen

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance

Hamed Mahmudi

University of Delaware - Department of Finance

Aazam Virani

University of Arizona - Department of Finance

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business

Date Written: March 3, 2020

Abstract

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 because it enables 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 explains why the provision is included only in 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

Chen, Zhiyao and Mahmudi, Hamed and Virani, Aazam and Zhao, Xiaofei, Why Are Bidder Termination Provisions Included In Takeovers? (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=2138979 or http://dx.doi.org/10.2139/ssrn.2138979

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Hamed Mahmudi

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Aazam Virani (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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