Breaking Up is Hard to Do? An Analysis of Termination Fee Provisions and Merger Outcomes

Univ. of Delaware Coll. of Bus. and Econ. Ctr. for Corp. Governance Working Paper No. 2002-005

51 Pages Posted: 19 Feb 2003

See all articles by Thomas W. Bates

Thomas W. Bates

Arizona State University - Department of Finance

Michael L. Lemmon

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

This paper provides large-sample evidence pertaining to the use of and wealth effects associated with provisions for termination fees in merger agreements between 1989 and 1998. The evidence suggests that target termination fee clauses are an efficient contracting device through which target managers compensate bidders for the costs associated with bid negotiation and the potential for information expropriation by third parties. While target fees truncate a normal bidding process, target shareholders gain from higher completion rates and greater negotiated takeover premiums in deals that include target termination fee clauses. Our findings regarding bidder fee provisions indicate that these clauses are used to lock-in a portion of target wealth gains in deals with higher negotiating costs and greater costs associated with bid failure. Compensation for bidder fee provisions appears to take the form of concomitant target fee provisions, and lower bid premiums.

Keywords: merger, acquisition, termination fee, breakup fee

JEL Classification: G34, K22

Suggested Citation

Bates, Thomas W. and Lemmon, Michael L., Breaking Up is Hard to Do? An Analysis of Termination Fee Provisions and Merger Outcomes (August 2002). Univ. of Delaware Coll. of Bus. and Econ. Ctr. for Corp. Governance Working Paper No. 2002-005. Available at SSRN: https://ssrn.com/abstract=346883 or http://dx.doi.org/10.2139/ssrn.346883

Thomas W. Bates (Contact Author)

Arizona State University - Department of Finance ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

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