Why Are Firms Sold? Disentangling Target Motives and Bidders’ Selection of Targets

Abstract

This study examines why certain firms seek strategic alternatives and why certain firms become targets of mergers and acquisitions (M&A). Using a sample of firms that have effectively put themselves up for sale in the M&A market, I model (1) the self-selection of firms to become potential takeover targets, which is distinct from (2) the selection of targets by bidders. The largely contrasting profiles of potential target firms and actual target firms highlight the difference between target motives and bidders’ selection of targets. This has not been empirically recognized in prior literature. Firms appear to seek strategic alternatives because they are performing poorly, but their governance mechanisms prompt the disruptive attempt to maximize shareholder value. Moreover, the subset of firms that actually receive bids have relatively better growth prospects and performance, and lower market risk—suggesting that bidders do not select under-performing targets. My findings provide qualified evidence for the bankruptcy avoidance hypothesis of target motives and suggest a nuance in the disciplining explanation of takeovers: inefficient firms appear to seek their own sale, rather than bidders choosing inefficient targets to discipline.

Keywords: strategic alternatives, mergers and acquisitions, takeovers, target motives, deal initiation, voluntary disclosure, media coverage

JEL Classification: D84, G34