Learn From Breaking Up: The Effect of Acquisition Experience on Termination Fee Provisions

Abstract

Research on acquisition experience has long debated whether and when this experience can improve acquisition performance. We contribute to this line of research by investigating learning that occurs in the strategic actions that acquirers take within the deal negotiation period. As an important tool to prevent breaking up with the target, we evaluated how acquirers use termination fee provisions in response to lessons learned from past success and failure as well as variations in the value of the target. Coding acquirer termination fee and target termination fee provisions from 3,974 agreements of U.S. public acquisitions from 1993 to 2014, we found that acquirers’ experience decreases the propensity to include both provisions in the agreement but this effect is driven by experiences with deals that are complete; a high proportion of experience with deals that are announced by not completed then increases the likelihood of using termination provisions. Moreover, when the target is more valuable, the negat...