How Much is Too Much? Large Termination Fees and Merger Outcomes

Abstract

We investigate the use and impact of large target termination fees in acquisitions. Large termination fees are associated with more post-bid competition and lower completion rates, suggesting high fees do not effectively lock-in friendly bidders. Large termination fees are more common in deals with small and distressed targets and deals with high advisory fees. Switching regression estimates predict that high-fee deals would receive lower premiums with reduced termination fees. Overall, our evidence suggests that targets use large termination fees to overcome contracting problems when bidders face high transaction costs and information risk. In contrast to prior literature, there is limited evidence that managerial self-interest motivates high fees, as target managers in these deals are not more likely to receive severance packages or employment with the bidder in high-fee deals.