Holdups, Renegotiation, and Deal Protection in Mergers

46 Pages Posted: 9 Oct 2017 Last revised: 14 Oct 2017

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2017

Abstract

We examine the contracting and negotiation process in mergers using an incomplete contracts framework. Our multi-period model allows for the arrival of new information and renegotiation after the signing of an initial merger agreement but before deal completion or termination. A properly designed initial contract mitigates the potential holdup problem during renegotiation and induces higher deal-specific effort, including the due diligence assessment of the deal. The contract grants an option to the target to terminate the merger, where the strike on the option compensates the acquirer’s deal-specific effort without imposing excessive costs on the target for pursuing non-merger alternatives. The option strike can be implemented by the use of deal protection devices, such as a target termination fee and/or an acquirer lockup. Finally, we provide empirical description for a large sample of cash and stock mergers that demonstrates the nature of contract renegotiation and how the use of deal protection devices can alleviate holdup problems.

Keywords: Holdup, renegotiation, merger, deal protection, termination fee, lockup

JEL Classification: G34, C71, D8

Suggested Citation

Hotchkiss, Edith S. and Qian, Jun and Zhu, Julie, Holdups, Renegotiation, and Deal Protection in Mergers (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3049231 or http://dx.doi.org/10.2139/ssrn.3049231

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Julie Zhu (Contact Author)

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

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