Termination Fees in Mergers and Acquisitions

Posted: 19 May 2005

See all articles by Micah S. Officer

Micah S. Officer

Loyola Marymount University - Department of Finance

Abstract

The paper provides evidence on the effects of including a target termination fee in a merger contract. I test the implications of the hypothesis that termination fees are used by self-interested target managers to deter competing bids and protect "sweetheart" deals with white knight bidders, presumably resulting in lower premiums for target shareholders. An alternative hypothesis is that target managers use termination fees to encourage bidder participation by ensuring that the bidder is compensated for the revelation of valuable private information released during merger negotiations. My empirical evidence demonstrates that merger deals with target termination fees involve significantly higher premiums and success rates than deals without such clauses. Furthermore, only weak support is found for the contention that termination fees deter competing bids. Overall, the evidence suggests that termination fee use is at least not harmful, and is likely beneficial, to target shareholders.

Keywords: Mergers and acquisitions, takeovers, termination fees, takeover premiums

JEL Classification: G34, K22

Suggested Citation

Officer, Micah S., Termination Fees in Mergers and Acquisitions. Available at SSRN: https://ssrn.com/abstract=725307

Micah S. Officer (Contact Author)

Loyola Marymount University - Department of Finance ( email )

Los Angeles, CA 90045
United States

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