To Merge or Not to Merge: Do Antitrust Regulations Impact the Final Outcome of a Merger Deal?

Abstract

A merger requires at least one of two separate yet equally important sets of negotiations. The first set involves merging parties to discuss issues related to the terms of the merger, including target firm's valuation. The second set resolves disputes between the merging parties and the law enforcement agency over the potential anticompetitive impact of the merger. In this paper, we investigate the determinants of the probability of completing an acquisition deal conditional on government approval. We apply a nested logit model to a sample of completed and cancelled acquisitions that allows the completion decision to be made in two steps- obtaining the regulatory approval in the first stage and making decisions to complete or cancel the deal in the second stage. We find that merger parties' decision to complete or cancel a merger deal is not independent of the law enforcement agency's decision to challenge the deal. Firm as well as deal characteristics of challenged deals are systematically different from those of unchallenged deals. Our results support previous empirical findings that mergers that are expected to induce larger increase in market concentration are more likely to be challenged by the law enforcement agencies. Including target termination fees is significantly positively related to the probability of completion irrespective of whether the deal is challenged or not. However, we document that including target termination fees deters competitive bidding only if the deal was challenged and leads to higher bid premium to the target firm only if the deal was not challenged. Conditional on the merger not being challenged, acquirer's investment opportunities and the relative size of acquirer and target firms are significantly positively related to the probability of completion, while target investment opportunities and the existence of multiple bidders are significantly negatively related to the probability of completion.