Premium
Sold Below Value? Why Takeover Offers Can Have Negative Premiums
Author(s) -
Weitzel Utz,
Kling Gerhard
Publication year - 2017
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12200
Subject(s) - consummation , shareholder , tender offer , value (mathematics) , economics , predictive power , profit (economics) , risk premium , phenomenon , monetary economics , efficient market hypothesis , financial economics , business , econometrics , microeconomics , stock market , finance , corporate governance , computer science , philosophy , physics , theology , epistemology , quantum mechanics , machine learning , paleontology , horse , biology
Abstract Many studies have acknowledged the existence of negative offer premiums where the initial bid undercuts the target's preannouncement market price. However, this phenomenon has not been explained. Negative premiums occur frequently and are no measurement error. We demonstrate theoretically and empirically that “hidden earnouts,” where target shareholders participate in the bidder's share of joint synergies, and corrections of overvaluation explain negative premiums. We find that target shareholders profit from the consummation of a takeover even if the announced offer has a negative premium. Our theory generalizes to low positive premiums with predictive power for the bottom 25% of all premiums.