Disentangling Target Motives and Bidders’ Selection of Targets in M&A

Abstract

Using a unique sample of firms that volitionally seek a sale or merger, I explore target firm motives and bidders’ selection of targets. I find that potential target firms have recent poor performance and high leverage, yet their corporate governance features, namely the presence of blockholders and golden parachutes, appear to incentivize the firms to seek a transaction. Subsequently, the subset of firms that receive bids have relatively better growth prospects and performance and lower market risk. The insights from separately modeling this two-step selection process are not obtained when predicting takeover targets using a one-step modelUsing a unique sample of firms that volitionally seek a sale or merger, I explore target firm motives and bidders’ selection of targets. I find that potential target firms have recent poor performance and high leverage, yet their corporate governance features, namely the presence of blockholders and golden parachutes, appear to incentivize the firms to seek a transaction. Subsequently, the subset of firms that receive bids have relatively better growth prospects and performance and lower market risk. The insights from separately modeling this two-step selection process are not obtained when predicting takeover targets using a one-step model.

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

JEL Classification: D84, G34