A Two-Side Approach to Acquisition Pricing and Completion

Abstract

Prior literature on acquisition premiums has mainly focused on the potential participation and impact of the acquiring firm’s CEO while overlooking the prospective underlying role of the target firm’s CEO. We argue that buyers and sellers jointly explain and determine the price in the process of acquisitions: The Acquirer’s CEO offers a premium that the target’s CEO assesses to see whether it is acceptable. Consisting with this notion, we propose that the psychological characteristics of CEOs on both sides of the negotiation collectively influence the determination of the final price (premium) and the conclusion of the M&A transaction. We develop several predictions about CEO-specific optimism on both sides of acquisition transactions, and its effect on premiums offered, premiums paid, and acquisition completion. Based on a sample of 192 non-hostile acquisitions between 2012 and 2016, we find that the acquirer firm CEO specific optimism correlates with higher acquisition premiums offered, while the target firm CEO specific optimism predicts the final premium and transaction completion. This research adds to the acquisitions literature by taking a two-sided approach pricing these types of strategic transactions.