Initiation of Merger and Acquisition Negotiation with Two-Sided Private Information

Abstract

In a dynamic model of merger negotiation with two-sided private information two-sided endogenous initiation, this paper investigates (1) what determines the timing of MA (3) why are bid premia dierent between target-initiated deals and bidder-initiated deals. The key driving force for the results is that the timing of initiation can reveal information about the target’s private signal of its standalone value, and the bidder’s private signal about its value for the target’s firm. The model predictions are consistent with the empirical evidence that emphasizing the role of private information in deal-initiation. Empirical evidence shows that who initiates an M&A deal varies from case to case, and this matters for how much bid premium the targets receive. Masulis and Simsir (2013) document that 36.7% of deals are target-initiated, while 63.3% are bidder-initiated. Also, targets receive lower bid premium for target-initiated deals (48.8%) than in bidder-initiated deals (62.8%). Moreover, the dierence remains after controlling for observable target financial conditions, implying that