Sold Below Value? Why Takeover Offers Can Have Negative Premiums

Financial Management, Forthcoming

68 Pages Posted: 25 Nov 2012 Last revised: 26 Aug 2017

See all articles by Utz Weitzel

Utz Weitzel

VU University Amsterdam

Gerhard Kling

University of Aberdeen - Business School

Date Written: August 30, 2014

Abstract

Although many studies have acknowledged the existence of negative offer premiums, where the initial bid undercuts the target's pre-announcement market price, this phenomenon has remained unexplained. Negative premiums occur frequently and are no measurement error. We show theoretically and empirically that negative premiums can be rationally explained with ‘hidden earnouts,’ where target shareholders participate in the bidder's share of joint synergies, and with corrections of target overvaluation. We find that target shareholders profit from the consummation of a takeover even if the announced offer has a negative premium.

Keywords: negative premiums, hidden earnout, overvaluation

JEL Classification: G33, G34, M21

Suggested Citation

Weitzel, Utz and Kling, Gerhard, Sold Below Value? Why Takeover Offers Can Have Negative Premiums (August 30, 2014). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2180286 or http://dx.doi.org/10.2139/ssrn.2180286

Utz Weitzel (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Gerhard Kling

University of Aberdeen - Business School ( email )

Business School
Aberdeen, Scotland AB15 5LQ
United Kingdom

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