Private Merger Negotiation Responses to Ongoing Tax Legislation

Abstract

Target valuation hinges on expected after-tax cash flows. But how do buyers and sellers adapt when future tax laws are uncertain or developing? Using hand-collected data, we examine the impact of tax policy developments on contemporaneous private merger negotiations surrounding U.S. corporate tax reform legislation in 2017. During the tax legislation period, bidders raise their offer prices relative to their initial bids when the target's expected gain from reform is high. The bidder's response to the target's gain from tax reform is concentrated in deals with competing bidders, when the target has a higher quality management team, or when the target's CEO is more involved in negotiations. When the target CEO is involved, the bidder's response to expected tax gains is strongest when the target CEO's incentives are more aligned with other shareholders. Individual bid increases in response to expected tax gains occur shortly after legislative events.

Keywords: taxes, mergers, acquisitions, uncertainty, policy JEL Codes: G34, G38, H2

JEL Classification: G34, G38, H25, H26