Sold Below Value? Why Takeover Offers Can Have Negative Premiums

Abstract

Although many studies have acknowledged the existence of negative offer premiums, where the initial bid undercuts the target's pre-announcement market price, this phenomenon has remained unexplained. Negative premiums occur frequently and are no measurement error. We show theoretically and empirically that negative premiums can be rationally explained with ‘hidden earnouts,’ where target shareholders participate in the bidder's share of joint synergies, and with corrections of target overvaluation. We find that target shareholders profit from the consummation of a takeover even if the announced offer has a negative premium.