Abstract
AbstractSince 2011, the United Kingdom has prohibited all deal protections—including termination fees—in mergers and acquisitions (M&A) deals. We examine the effect of this regulatory change on deal volumes, the incidence of competing offers, deal-jumping rates, deal premiums, and completion rates in the United Kingdom relative to the other European Group of 10 (G-10) countries. We find that M&A deal volumes in the United Kingdom declined significantly in the aftermath of the 2011 reform (in absolute terms and relative to deal volumes in other European G-10 countries). We find no countervailing benefits to targets’ shareholders in the form of higher deal premiums or more competing bids. Completion rates and deal-jumping rates also remained unchanged. Our results suggest that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals.
Highlights
Since September 2011, the United Kingdom has prohibited all deal protections – including termination fees – in acquisitions of U.K. public companies
Using a database of public-company M&A deals in the U.K. and a control group of other European G-10 countries over the period 2000-2015, we find that the incidence of deal volumes in the U.K. decreased approximately 50% after the 2011 Reforms, relative to the control group
The results indicate that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals, and that the loss in shareholder value from reduced deal volumes in the U.K. was not offset by higher bidding competition or deal premiums
Summary
Since September 2011, the United Kingdom has prohibited all deal protections – including termination fees – in acquisitions of U.K. public companies (hereinafter, the “2011 Reforms” or the “2011 Reform”). For the twelve-year period from 1999 to 2011, the U.K. permitted termination fees up to 1% of deal value and there was no restriction on other deal protection devices. This regulatory change presents the opportunity for a natural experiment: what happened to deal volumes, the incidence of competing offers, deal jumping, deal premiums, and deal completion rates in the U.K. M&A marketplace after the 2011 Reforms? In any public-company acquisition, the need for shareholder and regulatory approvals creates a window between the date of the deal signing/announcement and the date that the acquirer can close the deal This window, which is approximately three months on average, introduces the possibility that a higher-value bid will emerge between the signing and the closing. The typical solution in public-company M&A is “deal protection” (equivalently, a “lockup agreement”) which provides value to the first bidder in the event that the target board accepts a higher-value bid. Coates and Subramanian (2000) define a deal protection device as “a term in an agreement related to an M&A transaction involving a public company target that provides value to the bidder in the event that the transaction is not consummated due to specified conditions.”
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