Initiation of Merger and Acquisition Negotiation with Two-Sided Private Information

Abstract

In a dynamic model of merger negotiation with two-sided private information two-sided endogenous initiation, this paper investigates (1) what determines the timing of M&A initiation, and (2) who initiates the M&A negotiation; (3) why bid premia are different between target-initiated deals and bidder-initiated deals. The key driving force for the results is that the timing of initiation can reveal information about the target's private signal of its stand-alone value, and the bidder's private signal about its valuation for the target's firm. The model predictions are consistent with the empirical evidence that emphasizes the role of private information in deal-initiation.

Keywords: Merger and Acquisition, Deal Initiation, Bid Premium, Private Information

JEL Classification: G34, C78