The determinants of takeover premiums and payment methods in publicly traded acquisitions

Mergers and acquisitions are vital for corporations and the entire economic landscape. They represent competitiveness, diversification, and capital allocation, being essential for economic growth and development. However, some transactions are unsuccessful and destroy shareholder value despite the purpose of such transactions: creating shareholder value through synergies. This research aims to determine whether specific firm and deal characteristics impact takeover premiums and payment methods in publicly traded acquisitions. Existing financial literature presents various explanations for high takeover premiums and the choice of a payment method. However, inconsistencies occur, and prevailing determinants are still unexplored. Takeover premiums represent the additional payment for target company shareholders for the company's shares. Understanding the dynamics and motivations behind overpayment and the destruction of the value of the acquirers' shareholders is essential. Payment methods are critical regarding transaction structure as they determine and impact acquirers' cash assets, leverage, and equity. This research uses a data sample of 531 transactions from publicly traded companies in the United States between 1996 and 2019. The research is divided into two main parts: the first examines determinants for takeover premiums, and the second focuses on determining payment methods. The methodology in the first part is linear OLS regression, and the second part utilizes logistic regression for its suitability to binary dependent variables. The independent variables in both models are specific acquirer and target characteristics. The findings of this research mainly align with previous literature and financial theories. Highly profitable target companies discourage acquirers from paying extensive premiums due to lower growth prospects. Despite previous evidence regarding leverage ratios determining premiums, neither the acquirer nor the target company's leverage ratios explain premiums or payment methods, indicating that capital structure does not drive decision-making. Hence, contradicting previous findings, the trade-off theory does not explain premiums or payment methods. Moreover, cash payments are most frequent, confirming the pecking order theory. Payment methods are determined by the relative size of the acquirer and target, but the size factors do not explain takeover premiums. Information asymmetry regarding valuation determines takeover premiums as high-valued acquirers pay extensive premiums. However, asymmetric information does not explain payment methods. These results establish the prevailing determinants for takeover premiums and payment methods, highlighting the importance of various attributes in complex transaction processes and providing essential insights to all stakeholders to maximize transaction returns and benefits.