Determinants of deal premiums: An investigation of macroeconomic- and firm-related deal premium drivers in U.S. acquisitions from 2003 to 2009

Katrine Sundgaard Christensen & Kristine Lis Kring Simonsen

Student thesis: Master thesis


The objective of this study is to examine determinants of deal premiums in U.S. acquisitions from 2003 to 2009, and the impact of target industry. We are among the first to suggest that macroeconomic factors are important determinants of premiums. We hypothesize premiums to be negatively associated with economic conditions. We also hypothesize that firm-related factors continue to be vital determinants, and test the free cash flow theory and the undermanagement hypothesis. Lastly, we propose such relationships to differ across target firm industry groups. We use multiple linear regression to test a set of hypotheses on a sample of 255 U.S. acquisitions from 2003-2009. We examine the impact of target industry based on two overall groups, Services and Non-Services. We find strong support for differences in the impact of macroeconomic conditions on deal premiums across target industry groups. Macroeconomic conditions are more negatively associated with deal premiums when targets are in Services. We only find support for this negative associated for targets in Services. When examining firm-related premium drivers we find support for a positive association between the degree of target undermanagement and deal premiums for targets in Non-Services. We find no support for a positive association between bidder free cash flow and deal premiums, and therefore only find moderate support for our overall hypothesis that firm-related factors remain important determinants of premiums. Our results have several implications. Firstly, prior studies in the field largely fail to take into account target industry differences and should therefore be revisited. Secondly, bidder shareholders should be aware of the impact of macroeconomic conditions on deal premiums because the results imply that announcing offers during periods of economic stress might lead to larger premiums, which would decrease bidder shareholder wealth. Thirdly, if cash abundance is not a driver of deal premiums in acquisitions bidder shareholders should investigate other sources of management’s tendency to undertake value-destroying acquisitions to be able to put into place effective control measures. Lastly, the declining significance of firm-related factors in newer studies appear to stem from errors in relation to accounting-based measures, hence firm-related factors should still be examined as determinants of deal premiums going forward.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2012
Number of pages148