Determinants of termination fees in mergers and acquisitions in Asia Pacific

Abstract

With an increase in prominence of Asia Pacific as an M&A center, both Asian Buyers and Sellers will be looking to emulate their Western counterparts to structure deals with sophistication. With financial sophistication, deals tend to include a variety of deal protection feature. This paper is therefore interested in Asia Pacific Sell-Side Termination Fees, being fees given by the target to the bidder in the event that the target walks away from the deal, and in examining its different determinants.

Exploring the different theories proposed by existing literature, including the agency theory, efficiency theory, commitment theory, insurance theory and bargaining power framework, we have proposed seven variables that are expected under these theories to have a significant relationship to termination fees.

Thereafter, we have employed both univariate and multivariate regression models to a total of 520 transactions extracted from Capital IQ from the period of 2002 to Sep 2012 and concluded that the seven main determinants of Sell-Side Termination Fee are: Buy Side Termination Fee, Number of Advisors, Presence/Absence of Tender Offer, Stock % Offered as Part of Consideration, Implied Enterprise Value of Target, Target One-Month Pre-Announcement Returns and Implied Equity Value to Book Ratio.