Inside the 'Black Box' of Private Merger Negotiations

Abstract

This paper provides a detailed look inside the “black box” of merger and acquisition (M&A) negotiations before the first public bid is announced. We find that bid revisions are very common in the pre-public phase of a deal, and that both fundamental news about the target firm, and the public-market reaction to that news, during the private negotiation process have a significant impact on bidders’ acquisition costs. We also investigate whether the nature of the bid process has an impact on pre-public takeover price revisions and examine the strategic difference in bidding in deals that are initiated privately by a bidder other than the winning bidder. We interpret our results as consistent with the notion that the behavior of target managers in the private negotiation window appears congruent with shareholder wealth maximization (and inconsistent with systematic agency problems).

Keywords: Merger and acquisition (M&A) private negotiations, bid revisions, deal initiation, shareholder wealth

JEL Classification: G34, G30