When a Buyer Gets Cold Feet: What is the Value of a Bidder Termination Provision in a Takeover?

71 Pages Posted: 31 Aug 2012 Last revised: 24 Oct 2019

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: April 17, 2018

Abstract

Bidder termination provisions enhance a bidder's ability to terminate a takeover but are only included in some deals, and bidder termination fees vary. We liken these provisions to real options on targets' assets. Including them can be optimal because they enable termination when targets become less valuable to bidders than on their own, but creates a trade-off because bidders may terminate deals that should be completed. The provisions appear in takeover agreements when they increase expected joint takeover gains and termination fees are increasing in the provisions' option value. Combined announcement returns are larger in deals with appropriately priced provisions.

Keywords: Mergers and Acquisitions, Takeovers, Termination Fees, Real Options

JEL Classification: G13, G34, K22

Suggested Citation

Chen, Zhiyao and Mahmudi, Hamed and Virani, Aazam and Zhao, Xiaofei, When a Buyer Gets Cold Feet: What is the Value of a Bidder Termination Provision in a Takeover? (April 17, 2018). 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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