Target's Learning in M&A Negotiations

Abstract

Do pre-bid target stock runups increase bidder takeover costs? We analyze this question by modeling the target's learning from the runup about the bidder's value from the acquisition. Higher runups signal to targets higher bidder values, encouraging targets to ask for higher premiums. The markup-runup relationship is determined by the informativeness of the runup, which can reconcile the seemingly conflicting existing empirical findings and provides a strategy to test the target's managerial learning. Moreover, the target's learning accounts for the higher selling prices of listed targets. Finally, the target's learning may jeopardize ex-ante success of a socially desirable M&A deal.