Disentangling Target Motives and Bidders’ Selection of Targets

Abstract

Prior papers characterizing takeover targets do not address the possibility that certain attributes affect the selling firm’s volition to seek its sale while opposite attributes are sought by bidders. Using a sample of potential target firms that volitionally put themselves up for sale, I find that firms that seek strategic alternatives are performing poorly and have governance incentives to maximize shareholder value. In contrast, the subset of firms that receive bids have relatively better growth and performance, and lower market risk. It appears that, given their choices, bidders do not select under-performing targets, but that potential target firms discipline themselves.

Keywords: strategic alternatives; mergers and acquisitions; takeovers; target motives; target selection

JEL Classification: D84, G34