Information asymmetry, resource dependence, managerial cognition and experience, and takeover premium: a bargaining power theory

Purpose What determines the takeover premium in mergers and acquisitions? In practice, target valuation and negotiating takeover premiums are silent and finalized in secret. A vast literature has examined several aspects of mergers over the past century, though there is scant research on the pre-acquisition stage, that is, negotiations and target pricing. The purpose of this paper is to explore factors that affect the premium amount in merger and acquisition (M&A) negotiations. Design/methodology/approach This is a theoretical conceptual development paper on behavioral aspects of the negotiation strategy in mergers and acquisitions. The authors address the above important practical question by leveraging insights from the behavioral strategy and corporate finance literature. Findings Building upon the interplay logic between asymmetric information and resource dependence, the authors explore how managerial cognition, that is, anchoring perspective and prior acquisition experience, guide the focal bidder in gaining relative bargaining power, thereby determining a better takeover price for the focal target. This two-by-two decision matrix leads us to propose a bargaining power theory of takeover premium, including four types of premium decisions under different situations. The authors discuss them in single versus competitive bids, as well as in domestic versus cross-border M&A contests. Research limitations/implications This paper builds important theoretical foundations and recommends avenues for future research. Practical implications This paper recommends implications for managers in the corporate context, particularly top-level management and M&A advisors. Originality/value This paper is a unique attempt toward building a new perspective of bargaining power theory in M&A contests under the umbrella of the market for corporate control.