Bidder's Gain: Evidence from Termination Returns

Abstract

In most cases, bidder's stock returns around merger announcement convey more information than the synergy created from the acquisition. To overcome the interpretation problem, I study the bidder's return from the perspective of deal termination. Using a hand-collected dataset on terminated merger proposals, I investigate termination returns in deals canceled for reasons unrelated to the bidder's stand-alone valuation. I find that bidder's gain varies significantly with the type of target acquired. Further evidence suggests that the liquidity need of private target significantly contributes to the positive gain to the bidder.