Optimizing takeover premiums in M&A: The impact of target characteristics and strategic considerations

Challenging takeover premiums in deal situation can be difficult and the consequences are indeed material. If the proposed offer price is too high, value might be destroyed for the new owners. Is it too low, a proposed bid might be rejected. Therefore, understanding the underlying economics of takeover premiums is key.
Therefore, this article looked into 589 takeover premiums of closed European transactions, which occurred between 2005 and 2016. It was found out that both acquirers’ strategic considerations and target firms’ financial characteristics can have a substantial impact on the level of takeover premiums. An acquirer’s strategic intention to gain access to new geographical markets and to accelerate the firm’s growth rate through the acquisition of a high growth firm increase his willingness for higher bids and therefore higher takeover premiums. Furthermore, the results of this empirical study suggest that low market valuations of a target firm, existing restructuring potentials like cost inefficiencies, and a high certainty to materialize synergies drive takeover premiums higher.
Although every deal is unique in its own way, there are factors which correlate strongly with historically observable premiums paid. In order to optimize takeover premiums in deal situations, attention should be paid to the underlying economics of the deal and to which extend they could have an impact on the same.