چقدر معقول است ؟ اندازه هزینه های فسخ در ترکیب و ادغام

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.

Merger and acquisition bidders face uncertainty in that a proposed deal is vulnerable to third parties who attempt to make competing bids or to target shareholders who fail to approve the transaction. To protect their interests and seek remuneration for their investment in time and due diligence should the deal not be consummated, bidders often request that the targets provide termination fees, which entail a contingent payment to the bidder that is triggered in the event that management of the target abrogates the agreement.1 Since Ayres (1990) first presented his theoretical model examining the role of lockups, several studies have examined deal protection devices, which protect an initial bid against unwelcome competing bids during the interval period.2 Commonly used deal protection devices include, but are not limited to, termination fees, lock-up options, and no-shop provisions.3 Among the studies examining deal protection devices, Coates and Subramanian (2000) use both theoretical and empirical models of lockups and termination fees and focus on buy-side distortions. Officer, 2003 and Bates and Lemmon, 2003 provide two theories to explain why target managers agree to include termination fee provisions in deal agreements. The first is based on principal-agent theory, suggesting the provisions might be granted by self-interested managers to bidders where offers are in the target managers' best interests (usually because the offer includes job security or a severance package), but not necessarily in the best interests of target shareholders. Since the presence of deal protection provisions may reduce the possibility that competing bidders will make superior bids or reduce the size of the bids that are made, the agency conflict model predicts that the use of termination fees is detrimental to shareholders interests. The alternative efficient contractual device theory suggests that deal protection devices are used to solve possible contracting problems between bidders and targets in merger transactions. A contracting problem may occur if competing bidders free-ride on information initially revealed by the original bidder. This free-riding is costly for the original bidder. In addition, an initial bidder typically spends significant money and time in evaluating and negotiating with a target. Consequently, target managers may provide termination agreements to encourage the original bidder to reveal more valuable private information and make the investment of time and effort necessary to successfully complete a deal. The efficient contractual device explanation therefore predicts that termination fees are beneficial to target shareholder wealth. Both Bates and Lemmon, 2003 and Officer, 2003 find empirical evidence that merger deals that include termination fee provisions are more likely to involve greater deal premiums and higher completion rates than deals without such provisions. They conclude that termination fees generally benefit or, at least, are not detrimental to target shareholders. Although earlier empirical studies make important contributions to furthering our understanding of the role of termination agreements, little research has been done on why target firms offer termination fees at particular levels and on how fee size (as opposed to fee existence) affects deal performance and shareholders' wealth. For example, the empirical models of Bates and Lemmon, 2003, Boone and Mulherin, 2007 and Officer, 2003 utilize a discrete model where target firms are grouped based on whether the termination fee provision is included or not. One exception to this approach is Coates and Subramanian (2000) who analyze the determinants of fee size and report an upward trend in fee size during the 1990s. Coates and Subramaniam did not, however, focus on how fee size affects deal performance and shareholder wealth. In addition to reexamining the determinants of fee size, incorporating the changes in deal protection devices that have occurred over the last 10 years, we focus on how the size of fees affects deal performance and shareholder wealth. 4 The size of termination fees is important for a number of reasons. If the amount of the termination fee is too small, an initial bidder who is not fully protected against possible free-riding by competing bidders is not likely to reveal private information to facilitate the deal process or invest much time or effort in the process. Conversely, unreasonably high termination fees might raise suspicion that target managers are willing to preclude superior competing bids and might lead shareholders to forego a higher premium offer because paying a high termination fee would offset the higher premium in that offer. In addition, the size of termination fees is important in a legal sense. A higher fee raises the possibility that it will not survive judicial scrutiny because the courts might view it as a coercive measure designed to preclude competing bids (Block, 2007). Generally, the courts have arrived at the conclusion that termination fees ranging from 1% to 5% are reasonable and the fees have been upheld after legal challenges.5 In contrast, one court's view was that a termination fee of 6.3% “certainly seems to stretch the definition of range of reasonableness and probably stretches the definition beyond its breaking point” (Phelps Dodge Corp. v. Cyprus Amax Minerals Co., Civ. A. No. 17398 (Del. Ch. Sept. 27, 1999)). Determining whether the courts' instincts in these matters are supported by empirical evidence provides additional motivation for examining the question of whether unreasonably high fees are detrimental to shareholder wealth. We find that fee size varies significantly with the 75th percentile of dollar fee size being over 11 times greater than the 25th percentile of dollar fee size ($35 million versus $3 million). Although percentage variation in fee size is smaller with the 75th percentile of fee size as a percentage of deal value being 50% greater than the 25th percentile of fee size (3.9% versus 2.6%) it is still significant. Given that average deal values exceed the average pre-bid target market values by about 40% in our sample, the percentage variation in fees in terms of pre-bid target market values is even greater. Thus, there is substantial variation in fees both in dollar terms and in the proportion of pre-offer target market value. Given that we might expect informational investment of the bidder to be relatively constant across targets with a given market value, we find the extent of variation in percentage fees somewhat surprising. In this paper, we investigate what determines the size of termination fees and how it affects deal performance. Specifically, we seek to address the following questions: 1) What determines the variation in the size of termination fees? 2) How does the size of termination fees affect post-bid competition? 3) How does the size of termination fees affect the probability of deal completion, especially for deals with a high premium? 4) How does the market react to the size of termination fees? In order to answer the above questions, we utilize a database of 1702 merger agreements during the period January 2001 to December 2007. We first check the initial database by comparing termination fee data from the SDC Mergers and Acquisitions database to the original SEC filings, which we obtain from Livedgar. As documented in Boone and Mulherin (2007), the SDC data on the incidence of termination fee provisions is incomplete. By reviewing SEC filings for each of the deals in our sample (primarily Forms 14A, S-4 (for mergers), and 14D (for tender offers)), we find that about 84% of deals include termination agreements, while the SDC data report agreements for only 74%. In our empirical models, we employ both a continuous variable, the ratio of target termination fees to deal value, and discrete dummy variables for low, medium, and high fees to capture the presence of threshold effects in fee size.6 We employ the categorical variables because we find that the relationship of fee size to many of the variables of interest is often non-linear in a manner that masks significance of the continuous fee size variable. Specifically, in many cases the relationships exhibit threshold effects. We attribute this to the fact that fees appear to vary more than one might expect the information investment to vary across targets of a given size. Thus, when fees become too large, they become more suggestive of agency problems and a non-linear relation appears in the data. The findings generally support the proposition that low- or moderate-size termination fees serve as efficient contractual devices, while large-size termination fees are less beneficial to target shareholders' welfare. To arrive at this conclusion, first we examine the determinants of fee size, defined as termination fees as a percentage of deal value. The results of both univariate and multiple regressions are mixed with respect to whether fee sizes are consistent with the efficient contractual device hypothesis or the agency problem. The negative effects of a toehold, prior ownership affiliation, and prior bids on fee size suggest that target firms provide lower fees when bidders' costs of information collection are smaller. A longer interval period and higher bidders' advisory fees are costly to bidders and, thus, are associated with larger fees. However, there is some evidence that large fees may reflect target managers' self-interest. For example, there is no significant relationship between fee size and the deal premium, which is inconsistent with the notion that a bidder, when it is protected by termination fee provisions, is likely to offer a greater deal premium. Fee size is negatively correlated with institutional ownership of target firms, suggesting that if target managers are better monitored by institutional investors, they are less likely to offer higher termination fees. In addition, fee size is higher when target firms are smaller. Since target firm size is often considered a proxy for deal complexity (Bates and Lemmon, 2003), this would suggest that less complex deals have high fees, the reverse of what one might expect if fees are efficient contractual devices. Since the negative relationship between fee size and target size could be driven by either a relative constancy in dollar fee levels or a minimum dollar fee level necessary to cover bidder costs, we repeat our analysis parsing the data based on target size. We find the results are essentially consistent across size quintiles and between micro targets and larger targets. The findings are confirmed in the multinomial logit regression analysis, which shows evidence that target size and institutional ownership are smaller for deals including high termination fees than for deals with low or medium fees. Moreover, deals in the high-fee group tend to have lower deal premiums compared to the low- or medium-fee group. Therefore, a target's choice of large termination fees might suggest agency problems between target managers and shareholders. Second, we examine whether fee size is associated with post-bid competition. We find weak evidence that small-size fees actually increase post-bid competition, whereas moderate fees do not have a significant effect. A positive relationship between the incidence of termination fees and pre-bid competition is documented in Boone and Mulherin (2007). However, we find strong evidence that large fees lower the probability of post-bid takeover competition. We confirm that this result is not driven by high fees associated with micro-targets. The negative effect of these fee provisions is consistent with the findings of Bates and Lemmon, 2003 and Leshem, 2007. Thus, not only does the definition of competition affect the relationship, so too does the size of the fee. Third, we investigate the relationship between fee size and deal completion. Bates and Lemmon, 2003 and Officer, 2003 find that the presence of termination fee provisions significantly increases the probability of culminating the deal. They posit that the evidence supports the efficient contractual device hypothesis. However, termination fees may goad shareholders into approving deal agreements, not because they are good per se, but in order to avoid the cost of the fee. Therefore, the positive impact of the use of a termination fee on deal completion does not necessarily imply an efficient contractual role of termination fees. In order to address this issue, first we examine whether a higher fee increases the probability that deals are consummated. Consistent with Officer and Bates and Lemmon, our results show fee size is significantly and positively correlated with deal completion. Second, we examine whether fee size affects the probability that high premium deals are consummated. We find that low- and medium-fee structures significantly increase the probability that higher premium deals are completed. Interestingly, however, high fees significantly decrease the probability of completion of high premium deals, suggesting that high termination fees are less beneficial than low- or medium-fees. We again confirm that this result is not driven by high fees associated with micro-targets. Deals that are most beneficial to target shareholders are less likely to be completed when the fee is high. We then investigate the relationship between fee size and announcement returns. After controlling for the effects of selection bias, we find that the effect of fee size on the cumulative abnormal returns (CARs) around the announcement date is not significantly different from zero with the exception that CARs are significantly lower for deals including termination fees larger than 5%. The market seems to be indifferent when fees are low or moderate and only penalizes deals if the fees are very large. Although there is a greater variation across target size with respect to this result, it is again not driven by high fees associated with micro-targets. Overall, we conclude that low- or moderate-size termination fees serve as efficient contractual devices, while large fees are less beneficial to shareholders. This study contributes to the literature in several ways. To the best of our knowledge, this is the first study that presents empirical evidence on the effect of fee size on deal performance and target shareholder's wealth in the U.S market. 7 We also revisit the determinants of fee size in light of the evolution of deal protection devices since the Coates and Subramanian (2000) study. The results show that low or moderate size termination fees serve as an efficient contractual device, whereas large fees suggest possible agency problems between target managers and shareholders. We examine the relationship between termination fee size and post-bid competition and find that only large fees are likely to truncate post-bid competing offers, while low fees actually attract those bids. Our findings also complement previous research on deal completion. We point out that a higher success rate is not always positively related to shareholders' wealth, and show that high fees actually decrease the probability for high premium deals to be consummated. The paper is organized as follows. In Section 2, we describe the sample. Section 3 discusses and analyzes the determinants of the size of termination fees. In Section 4, we analyze post-bid takeover competition. Section 5 analyzes deal completion. Section 6 analyzes announcement returns, while Section 7 concludes.

While several studies (e.g. Bates and Lemmon, 2003, Boone and Mulherin, 2007, Coates and Subramanian, 2000 and Officer, 2003) make important contributions to furthering our understanding of the role of termination fee provisions, little research has been done on why target firms offer termination fees at various levels. In this paper, we investigate what determines the size of termination fees and how this affects deal performance. Specifically, we seek to address the following questions: What determines the variation in the size of termination fees? How does the size of termination fees affect post-bid competition? How does the size of termination fees affect the probability of deal completion, especially for deals with a high premium? How does the size of termination fees affect announcement returns? This study contributes to the literature in several ways. First, to the best of our knowledge, this is the first study that both presents empirical evidence on the determinants of the size of termination fees and their effects on deal performance in the U.S market. The findings generally support the proposition that low- or moderate-size termination fees serve as efficient contractual devices, while the use of large-size termination fees suggests potential agency conflicts. That is, there is a threshold beyond which termination fees lose their more desirable properties. First, the size of termination fees is negatively correlated with institutional ownership and deal size. Moreover, deals in the high-fee group tend to have lower deal premiums compared to the low- or medium-fee group. Therefore, a target's choice of large termination fees appears to be associated with the agency problems between target managers and shareholders. Second, small-size fees actually increase post-bid competition, whereas moderate fees do not have a significant effect. There is strong evidence that large fees reduce post-bid competing bids. Third, medium-fee structures significantly increase the probability that higher premium deals are completed. However, a high fee significantly decreases the probability of completion of high premium deals. Fourth, after controlling for the effects of selection bias, the effect of fee size on the cumulative abnormal returns (CARs) around the announcement date is not significantly different from zero with the exception that CARs are significantly lower for deals including termination fees larger than 5%. The market seems to be indifferent as to whether fees are small, medium, or large, but only penalizes deals if the fees are unreasonably large. None of these results is driven by the fact that micro-cap targets often have larger percentage termination fees. Overall, we conclude that moderate size termination fees serve as efficient contractual devices, while large fees are less beneficial to shareholders, suggesting possible agency conflicts. It is interesting that the threshold where the negative effects of high fees begin to appear is relatively close to the threshold at which the Delaware courts have begun to question fee size. The courts appear to have instinctively recognized the threshold that we empirically document.