Determinants of premiums in acquisition transactions

Abstract

AbstractThis paper presents a framework to identify the determinants of acquisition premiums so as to explain their cross‐section variability. Observed premiums are predicted to be positively related to (1) the magnitude of the acquiring firm's estimate of acquisition gains and (2) the acquired firm's relative bargaining strength. Increased acquisition gains are argued to result from two sources—underpricing and undermanagement. The variables representing these sources are constructed from pre‐acquisition data. A gains variable based on the post‐acquisition stock‐price reactions of the acquiring and acquired firm is also constructed. It is argued that acquired‐firm bargaining strength is enhanced by an increase in the degree of competition in the acquisitions market and by the inclusion of anti‐takeover amendments in the acquired firm's corporate charter. The predictions are tested on a sample of 77 completed cash‐for‐stock and stock‐for‐stock acquisitions over the time period 1975–80. The empirical results provide strong support for the predicted effects of the determinants of (2) and mixed support for the determinants of (1). This is the first study to document the predicted effects of anti‐takeover amendments on observed premiums.