Here’s an interesting new study that compares the valuations of deals initiated by sellers to those initiated by buyers. It turns out that who makes the approach matters a lot when it comes to the value that the target’s shareholders receive. Here’s the abstract:
We investigate the effects of target initiation in mergers and acquisitions. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals.
This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.
The authors contend that when a target initiates a deal, potential buyers become more skeptical about valuation, because companies with stocks that are undervalued prefer to remain independent – while overvalued targets are happy to pursue a sale before the roof caves in.
– John Jenkins