Unknown less than 15 years ago, termination fees (otherwise called kill fees) are now a commonplace component of merger and takeover agreements. Such fees typically require target firms to pay a monetary consideration to bidders if a merger or takeover agreement is broken. However, institutional investors and shareholder groups have expressed strong reservations about the magnitude of such termination fees in recent large transactions. We argue that the magnitude of termination fees reflects either potential agency problems or economic efficiency considerations. Focusing on a sample of mergers and acquisitions involving Canadian targets that allows us a richer ownership structure environment and an ability to obtain exact information on merger costs and termination fees, we evaluate the determinants of the magnitude of termination fees.
First, we show that the Thomson Financial Securities Data's SDC PlatinumTM Worldwide Mergers & Acquisitions Database underestimates the true extent of termination fees. Second, results are consistent with termination fees being an efficient mechanism. Termination fees are found to be higher in transactions where the bidder incurs extensive merger costs, the deal includes a cash component and operating synergies are expected. We also find that deal premium and termination fees act as complements. Third, we do not find strong support for termination fees being a sign of agency problems. Relative termination fees are not related to changes in the CEO's golden parachute the year before the deal or to CEO retention in the acquiring firm. We do find that relative termination fees are greater with lower levels of CEO shareholdings but decrease as CEO ownership increases. Further, mechanisms related to greater monitoring do appear to reduce the level of relative termination fees. Relative termination fees are lower when the target has greater outside directors or higher leverage. Fees are also lower when we have very large family or financial block holdings. However, termination fees may simply act as complements to binding agreements from large shareholders to vote in favour of the deal or tender their shares.
| First name | Last name | Gender | Rank | Affiliated Institution | Country |
|---|---|---|---|---|---|
| Samer | Khalil | Male | American University of Beirut | Lebanon | |
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Bio: Samer Khalil, PhD, CVA: Associate professor of Accountancy and Chairman of the Finance, Accounting, and Managerial Economics department at the He received his PhD from Concordia University, Montreal, in 2005. He taught one year at HEC, Montreal, before joining the American University of Beirut in September 2006 where he lectures on accounting and business valuation related issues at the under-graduate, graduate, and executive MBA level. Dr. Khalil also participated in various executive training in Lebanon and the Middle East. He has published various paper related to mergers and acquisitions, corporate governance, in addition to auditing has Been published in reputable journals including Auditing, Accounting Horizons, and the Journal of Business Finance and Accounting. Before pursuing his academic career, Dr. Khalil worked as a chief accountant at Sogex SAL before Joining MIC Consultants. Dr. Khalil has been involved in various valuation engagements in Saudi Arabia and Lebanon. He has also been involved in various corporate restructuring and turnaround engagement in the KSA. |
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Scientific field
Business & Public administration
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Start Year2008
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End Year 2009
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