Merger Negotiations Research Articles

Rise and Fall of Ordinary Course Covenants and MAE Clauses: Case and Trend Analysis

In the United States, the ordinary course of business provision has received inadequate attention in the field of corporate mergers and acquisitions. As anyone in the field is probably aware, the ordinary course of business covenant (“OC Covenant”) is one of the most common provisions included in almost every merger agreement. Illustrated by the fact that there are remarkably few notable precedents for the OC Covenant, despite its prevalence in merger agreements, notions of implementations and implications of the covenant have not drawn much attention from related professionals and scholars.
 In turn, material adverse effect provisions (“MAE Provision”) have been “The Beatles” of mergers and acquisitions in the United States. Since its increased practical relevance from the subprime mortgage crisis, many notable precedents have since proved and confirmed that the MAE Provision’s sophisticated and complex enforcement standards made this provision extremely difficult to execute in the real world. However, in actual merger negotiations the provision has never stepped down from its celebrity status. Many influential theorists view the MAE Provision as having absolute authority in connection with risk allocation during the time from signing agreements to closing the transaction, and with such recognition in past decades, the MAE Provision holds an untouchable significance by being perceived as an attractive route to call off agreed transactions in a crisis.
 This article proclaims that given recent trends in contract drafting and court decisions in connection with risk allocation during the interim period between signing and closing the merger, the role of the OC Covenant has been strengthened. To support this analysis, this article will proceed as follows. In Part I, this article will introduce the general features and background for the MAE Provision and the OC Covenant. In Part II, this article will introduce relevant risk allocation theories that have been suggested to govern risk allocation in order to present the history of important theories and their developments. In Parts III and IV, this article will examine features and developments of the MAE Provision and the OC Covenant with case examinations and literature analysis. The sections will refer to the 2021 data examination that Professor Guhan Subramanian conducted by examining 1,293 merger agreements in the MergerMetrics Database. The analysis will cover current structural shapes, as well as legal interpretation standards from meaningful precedents. Finally, in Part V, this article will propose a new understanding scheme for the risk allocation structure that implements and combines the academic theories, and drafting and litigation trends.

Initiating contact in merger negotiations: Who leads and who follows?

We examine the determinants of the managers’ choice of negotiating procedure when firms merge. We use company filings with the Securities and Exchange Commission (SEC) to identify the merging firms’ negotiating procedure and their underlying operating, marketing, and financial motivations for pursing the deal. When target-firm managers cite technological expertise and access to capital as reasons for the merger, we find that they are less likely to use an auction as the sales procedure. Acquiring-firm managers are less likely to initiate the process when they cite technological expertise as a reason for the merger.

Doing a Deal? Merger and Acquisition Negotiation and Business Strategy Analysis: Case Study of Amazon and MGM

Doing a Deal? Merger and Acquisition Negotiation and Business Strategy Analysis: Case Study of Amazon and MGM

Takeover duration and negotiation process

AbstractWe study the relations between takeover negotiations duration, competition and learning, focusing on the private phase of bidder‐initiated transactions. While the negotiation goes on, both parties learn about true deal synergies. At any moment, rival bidders can show up and compete for the target. Using a discrete‐time finite‐horizon dynamic programming approach, we derive the equilibrium relations between the negotiation duration, the pressure of potential competition and the learning process. Next, we perform a calibration exercise on a large sample of merger negotiations with hand‐collected data from the Securities and Exchange Commission filings. Our results provide evidence of a very competitive M&A (Mergers and acquisitions) market.

The Role of Lockups in Stock Mergers

We document the frequent use of stock lockup agreements in mergers and acquisitions (MA ex-ante, lockups adoption likelihood increases with acquirers’ valuation. Lockups also come with higher deal completion likelihood; shorter merger negotiations; higher long-term operating performance. We conclude the market interprets lockups as a signal of strong fundamentals, particularly when acquirers’ valuations are high.

How Do Equity Analysts Impact Takeovers?

Firms covered by more analysts are more likely to become takeover targets and more likely to enter deals in which their acquirers initiate private merger negotiations. Moreover, when equity analysts’ pre-acquisition price forecasts imply greater target undervaluation, target firms are more likely to initiate their own sale, takeover premiums are higher, those premiums tend to be revised upwards during private merger negotiations, and acquirer firms use less cash to structure the transaction. These results imply a material role for equity analysts during the M&A process: their coverage affects takeover probabilities while their price forecasts influence merger premiums and the merger consideration. Our findings support both investor recognition and information generation theories about the role of equity analysts in financial markets.

Appraisal Waivers

Appraisal is a controversial topic. Policymakers have debated the goals served by the appraisal remedy, and legislatures have repeatedly revised appraisal statutes in an effort to meet those goals while minimizing the cost and potential abuse associated with appraisal litigation. Courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on case-specific factors. These difficulties are exacerbated by variation in the procedures by which mergers are negotiated and the potential for conflict-of-interest transactions. Private ordering offers a market-based alternative to continued legislative or judicial efforts to refine the appraisal remedy. Through firm-specific appraisal waivers, issuers can limit or eliminate the scope of appraisal rights, thereby reducing the cost and uncertainty of appraisal ex ante. Private companies are making increasingly use of such appraisal waivers, an effort facilitated by a Delaware decision upholding the validity of an appraisal waiver in a private company shareholder agreement. Public companies have not followed the lead of private companies, however, presumably because of impracticality of using shareholder agreements in public companies and a concern that an appraisal waiver in a charter or bylaw would be invalid. This Article considers both the normative and legal case for appraisal waivers. It argues that the modern role of appraisal rights – disciplining the merger negotiation process and policing potential conflicts of interest – warrants understanding appraisal as a structural component of corporate governance rather than a personal right of individual shareholders. Accordingly, it challenges legal analysis that distinguishes between contractual waivers and those in a corporation’s governing documents. It nonetheless reasons that firm-specific freedom to limit or eliminate appraisal rights through waivers is normatively desirable in that it reduces the pressure on lawmakers to get the appraisal remedy “right,” allows appraisal rights to vary in accordance with firm-specific factors and allows tailored appraisal rights that vary according to transactional features. It concludes that both public and private companies should have the power to adopt appraisal waivers. The Article then considers the legal case for appraisal waivers and determines that their validity under current law is questionable at best based on both the scope of existing appraisal statutes and public policy considerations. In light of its conclusion that the availability of appraisal waivers is normatively desirable, the Argument advocates resolving this uncertainty through legislation. The Article proposes that corporation statutes explicitly authorize corporations to modify or eliminate appraisal rights, but that such waivers should only be permitted in corporate charters. This paper was originally posted with the working title of “Appraisal Waivers.”

An Empirical Study of OmniAmerican Bancorp’s Merger with and into Southside Bancshares

In this paper, we investigate the short- and long-term wealth effect of OmniAmerican Bancorp’s merger with and into Southside Bancshares. Given that OmniAmerican Bancorp made a ‘take-me-over’ announcement four months before the merger negotiations commenced, which may have given rise to market anticipation, we have employed a longer short-term testing window in order to capture the price run-ups. We show that this acquisition increased OmniAmerican Bancorp’s shareholder wealth by $35.44 million whereas decreased Southside Bancshares’ shareholder wealth by $25.61 million. However, statistically insignificant abnormal returns were found in both the short and long terms for the shareholders of the combined entity, indicating the acquisition’s overall value-neutral nature. This finding appears consistent with the (on average) non-value-destroying results documented in the post-crisis merger wave, but it seems inconsistent with the value-enhancing results observed in intra-state commercial bank mergers. Assuming that gains from the revaluation of the combined value of the bidder and target stocks typically come from the merged entity’s incremental earnings, we conclude that the market’s value-neutral assessment was correct in terms of predicting no significant profit enhancement of the merged entity when full integration of OmniAmerican Bancorp into Southside Bancshares was achieved.

Strategic Decisions in Takeover Auctions

This essay reviews selected theories and empirical evidence describing how bidders and targets navigate four complex decisions involved in any corporate takeover attempt: (1) deal initiation, (2) pre-offer toehold acquisition, (3) offer price and revisions, and (4) the method of payment. We focus in particular on how first-price or English (ascending price) auctions with two competing bidders and a single (pivotal) seller help understand bidder and target incentives in each of these strategic decisions. While largely descriptive of tender offers for control, the auction framework also helps explain choices made in takeover negotiations where the outside option is the outcome of an open auction. Empirical findings include the following key observations: (1) A large fraction of control bids for public targets - about 50% - are initiated by the target and not the bidder. (2) Notwithstanding takeover premiums averaging 40+%, only a small fraction (less than 5%) of bidders acquire a partial ownership position (a toehold) in the target prior to bidding. However, when they do acquire a toehold, it is large (on average 20%). (3) Rival bids are observed in less than 10% of the contests, suggesting that the initial public bid deters further competition. When rival bidder do enter the auction, they do so surprisingly quickly - within two weeks of the initial bid on average - suggesting that bidder valuations are correlated. Bid jumps are large (around 30%), consistent with significant bidding costs. The evidence also supports the hypothesis that the pre-offer runup in the target's stock price includes an element of rational deal anticipation by the market, and that the runup is understood as such by the two parties in merger negotiations. (4) Contrary to theories of bidder opportunistic behavior, the likelihood that a given deal is paid in bidder stock is higher when the target is highly informed about the bidder's operations and so able to value the bidder shares more precisely. This evidence supports the (nested) alternative theory that the bidder's preference to pay in stock rather than in cash is driven by concerns with adverse selection on the target side of the deal. Also, the initial market reaction to the stock payment decision is such that there is no evidence of subsequent abnormal long-run performance for long-short portfolios sorted on cash- versus stock as the payment method.

Incentive‐compatible contracts in merger negotiations: The role of acquirer idiosyncratic stock return volatility

AbstractWe show that the acquiring firm's idiosyncratic stock return volatility (sigma) is an important determinant of the selection and perceived valuation effects of earnouts in Mergers and Acquisitions (M&As). Earnout‐based M&As are more often announced by high‐sigma acquirers (nearly 40% of all earnout‐based M&As), yet the documented higher risk‐adjusted returns accrued to acquirers in earnout‐based M&As, relative to M&As settled in cash, stock or mixed payments (the earnout effect), appear in deals announced by low‐sigma acquirers (nearly 20% of all earnout‐based M&As). High‐sigma acquirers employing earnouts appear to break even, or even experience losses, relative to their counterparts employing single up‐front payments. These results are confirmed based on a quasi‐experimental design through which the earnout effect is measured in isolation. We argue that in M&As announced by high‐sigma acquirers, the earnout effect is potentially elusive due to the presence of an acquirer‐specific information revelation effect, resulting from the heightened extent of information asymmetry between (small) acquirers’ managers and outside investors. On the contrary, the use of earnouts in M&As announced by low‐sigma (large) acquirers, whereby the acquirer‐specific information revelation effect is likely negligible, sends a strong signal for value creation that also prevents investors from inducing a size‐related discount.

Inside the 'Black Box' of Private Merger Negotiations

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.

Merger Negotiations in the Shadow of Judicial Appraisal

The recent surge in appraisal litigation has sparked debate over the desirability of appraisal and how this remedy should be structured. Much of this debate is based on untested assertions about appraisal’s ex ante effect on the structure and pricing of takeovers. Systematically investigating this effect, we find evidence that target shareholders receive higher abnormal returns as the strength of the appraisal remedy increases. We find no evidence that bidders offer a lower up-front price as a means to pay off dissenting shareholders after a sale. Furthermore, threat of appraisal does not appear to limit takeover activity or impact the method of payment. Overall, our results suggest that appraisal provides an important ex ante protection for target-firm shareholders.

Integration of an Academic Medical Center and a Large Health System: Implications for Pharmacy.

Objective: To provide lessons learned for colleges of pharmacy and large health systems that are contemplating or in the process of undergoing integration. Method: This report describes the merger of an academic medical center and large health system with a focus on the implications of the merger for pharmacy from the perspectives of both a college of pharmacy and a health system's pharmacy services. Results: Overarching pharmacy issues to consider include having an administrator from the college of pharmacy directly involved in the merger negotiation discussions, having at least one high-level administrator from the college of pharmacy and one high-level pharmacy administrator from the health system involved in ongoing discussions about implications of the merger and changes that are likely to affect teaching, research, and clinical service activities, having focused discussions between college and health system pharmacy administrators on the implications of the merger on experiential and research-related activities, and anticipating concerns by clinical faculty members affected by the merger. Conclusion: The integration of a college of pharmacy and a large health system during the acquisition of an academic medical center can be challenging for both organizations, but appropriate pre- and post-merger discussions between college and health system pharmacy administrators that include a strategic planning component can assuage concerns and problems that are likely to arise, increasing the likelihood of a mutually beneficial collaboration.

The Lafarge-Holcim merger negotiations

The Lafarge-Holcim merger negotiations

The Lafarge-Holcim merger negotiations

The Holcim and Lafarge merger case is significant as two globally-leading cement producers obtained early-stage regulatory approval from the European Commission due to a comprehensive large-scale set of pre-emptive remedies. This case shows that it is possible to achieve early-stage regulatory approval even for transactions of enormous scale if the merger parties address all competition concerns up-front through a credible, clear-cut and all-embracing package of remedies. Lafarge and Holcim faced a rapidly changing global cement market characterised by overcapacity in industry and overcame the problem of unprofitable investments by creating a powerful position for the merged company within the industry. The two private sector protagonists were able to build process trust and a common approach to the task enabling the merger to proceed.

She is mine: Determinants and value effects of early announcements in takeovers

Some bidders voluntarily announce a merger negotiation before the definitive agreement. We propose an “announce-to-signal” explanation to these early announcements: they allow bidders to signal to target shareholders high synergies so as to overcome negotiation frictions and improve success rates. Consistent with signaling, we show that negotiation frictions predict earlier announcements. Early announced transactions are associated with higher expected synergies, offer premium, completion rates, and public competition. Moreover, bidder announcement returns do not suggest overpayment and the existence of agency issues in these transactions. Taken collectively, our findings rule out alternative explanations such as managerial learning from investors and jump bidding.

Private Information and Stock Prices: Evidence from Nonpublic Merger Negotiations

We use SEC-mandated disclosures to identify the dates when new private information about target or acquiring firm value is generated. Informed investors appear to immediately trade on new private information. The speed of their trading activity can be explained by the number of privately informed investors, institutional ownership, the expected profits from informed trading and associated risk of attracting the attention of enforcement agencies, and media speculation about an acquisition deal.

Merger Negotiations in the Shadow of Judicial Appraisal

The recent surge in appraisal litigation has sparked debate over the desirability of appraisal and how this remedy should be structured. Much of this debate is based on untested assertions about appraisal’s ex-ante effect on the structure and pricing of takeovers. Systematically investigating this effect, we find evidence that target shareholders receive higher abnormal returns as the strength of the appraisal remedy increases. We find no evidence that bidders offer a lower up-front price as a means to pay off dissenting shareholders post sale. Furthermore, threat of appraisal does not appear to limit takeover activity or impact method of payment. Overall, our results suggest that appraisal provides an important ex-ante protection for target firm shareholders.

'She Is Mine': Determinants and Value Effects of Early Announcements in Takeovers

We examine the reasons why some bidders choose to voluntarily announce a merger negotiation before the signature of a definitive agreement. We propose an “announce-to-signal” explanation: early announcements allow bidders to signal to the target shareholders high synergy of the transaction, so as to overcome negotiation frictions and improve success rates. However, early announcements raise the target’s reservation price. In equilibrium, bidders rationally tradeoff higher success rates and costs. Consistent with this explanation, we show that a bidder’s weak bargaining position predicts an earlier announcement. Early announced transactions are associated with higher expected synergies and completion rates. Public competition and offer premium are also higher in these transactions, consistent with costly signaling. However, bidder announcement returns do not suggest the existence of overpayment in early announced deals.

Takeover Duration and Negotiation Process

We study the determinants of the takeover processes duration. In our model, we focus on bidder initiated, one-to-one negotiations. An initial bidder submits an offer to the target. The target either accepts, and the transaction is completed, or rejects. The bidder has then the choice between going away or continuing the negotiation. As time goes on, the bidder and the target learn about true synergies thanks to the negotiation process. But rival bidders can show up and compete to acquire the target. Using a discrete time finite horizon dynamic programming approach, we study the equilibrium relations between the negotiation duration, pressure of potential competition and the learning process. We turn next to a calibration exercise based on a large sample of merger negotiations, collecting initiation and negotiation duration in SEC filings. We parallel the simulated method of moments to match the frequency distribution of private negotiation duration. Our results suggest that the M&A market is much more competitive than previously thought.