Inside the 'Black Box' of Private Merger Negotiations

Abstract

Using unique, hand-gathered data, this paper examines how public news about the target firm released publicly during the private merger negotiation process affects bidding strategies. We provide strong evidence that market reactions to information events during the private sale process have a substantial impact on takeover prices. However, the sensitivity of private bids to target-firm public market returns varies significantly depending on the source of the news. Moreover, bidders are more sensitive to news releases in their first private bids and have lower sensitivity to news released when they make bid revisions after the initial private bid submission. In general, bid responses to positive news are stronger than bid responses to negative news. Overall, our findings provide novel evidence suggesting that the market reactions to the release of information during merger negotiations have important implications for takeover costs.