Deal Initiation in Mergers and Acquisitions

Ronald W. Masulis and Serif Aziz Simsir

We investigate the effects of target initiation in mergers and acquisitions. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals. This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managersÂ’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.

 

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