Deal Initiation in Mergers and Acquisitions

Deal Initiation in Mergers and Acquisitions

Ronald Masulis, Serif Aziz Simsir

Series number :

Serial Number: 
371/2013

Date posted :

June 01 2012

Last revised :

July 31 2013
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Keywords

  • Mergers & Acquisitions • 
  • Merger Initiation • 
  • financial distress • 
  • FinancialConstraints • 
  • Industry and Economy shocks • 
  • Information Asymmetry • 
  • TakeoverPremiums • 
  • event study • 
  • Self-selection problem

This study investigates deal initiation in the context of mergers and acquisitions. We investigate how bidder and target initiated merger offers differ. Our analysis reveals that target financial or economic weakness, target financial constraints and economy wide shocks are important motives for target-initiated deals.

We also find that average bid premiums, target cumulative abnormal returns (CAR) measured around the merger announcement dates and the deal value to EBITDA multiples of target-initiated deals is significantly lower than in bidder-initiated deals. However, this gap cannot be explained by weaker financial conditions of targets immediately prior to merger announcements. After adjusting for self-selection, we find evidence that the private information held by target firms is the main driver of the lower premiums observed in target-initiated deals. Supporting this perspective, the premium gap between bidder- and target-initiated deals widen when the information asymmetry between the merging firms gets higher.

Authors

Real name: 
Serif Aziz Simsir
Research Member
School of Banking and Finance, Australian School of Business