Mergers and Acquisitions: Termination Fees and ...

JOURNAL OF OF MANAGERIAL MANAGERIAL ISSUES ISSUES JOURNAL Vol. XXVI Number Number41 Winter Spring2013: 2014:360-380 44-54 Vol. XXV

Mergers and Acquisitions: Termination Fees and Acquisition Deal Completion

Frank C. Butler

Assistant Professor of Management University of Tennessee at Chattanooga

Peter Sauska

Enterprise Rent-A-Car Heathrow London

Mergers and acquisitions (M&A) are an oft-used vehicle for diversification for many organizations. In the past decade, thousands of M&As have been undertaken annually. In 2011, the global M&A activity totaled $2.1 trillion, with $820.6 billion in the U.S. alone (InvestorPlace staff, 2012). However, many of these M&As fail to produce the financial results expected of them (King et al., 2004). There has been significant research on M&A integration and factors influencing their success or failures; however, there has been little research performed examining the pre-completion facets of M&As. In the sample found in this study, 13% of the M&A activity failed to be completed. Given this number, this study examines the effect of the presence of termination fees on M&A deal completion. Building from the nascent research on termination fees in M&As, this study’s aim is to synthesize and improve the understanding of termination fees. A termination fee, a penalty paid by the target to the acquirer in the event of an M&A agreement being terminated, has become increasingly used by firms undertaking M&As (Jeon and Ligon, 2011). As M&A agreements are often quite complex and costly, the presence of termination fees help protect the firms involved in the event of a terminated deal. This is especially true for publicly traded companies involved in M&A activity as there may be long periods between the announcement of the deal and the actual completion, known as the interval period. The interval period can delay the completion of a deal for a multitude of reasons, including waiting for shareholder approval or governmental anti-trust review. The longer the interval period, the likelihood of a deal being completed decreases (Afsharipour, 2009; Miller, 2007).

JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

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To countervail the issues associated with the costs that accrue with M&A deals prior to their completion, termination fees have become increasingly used. The number of M&A transactions that include termination fees has been on the rise. In 1989, only two percent of M&A transactions included such a fee, and by 1998 termination fees had climbed to 60% of all deals (Bates and Lemmon, 2003). Nearly a decade later termination fee usage increased to roughly 87.5% (Jeon and Ligon, 2011). As this trend depicts, termination fees are becoming an increasingly used device to protect the acquirer in an M&A transaction. The research on termination fees has shown evidence of increased deal completion when termination fees are present (Bates and Lemmon, 2003; Officer, 2003; Jeon and Ligon, 2011). As the utilization of termination fees becomes the norm, it becomes imperative to examine how the size of these fees helps or assists with the completion of these deals. Empirical evidence has shown that there is a link between the size of the termination fee and deal completion (Jeon and Ligon, 2011). Building from these studies on termination fees, the presence of termination fees and their effect on M&A deal completion are explored. As much of the research on termination fees originates in either the finance literature (e.g., Jeon and Ligon, 2011) or legal literature (e.g., Afsharipour, 2010), this study intends to examine termination fees from a strategic management perspective. In addition, this study utilizes a sample of M&A transactions to demonstrate evidence of how these termination fees 1 lead to increased deal completion. The next section will examine termination fees in more detail. This is then followed with descriptive information on the sample utilized in this study and empirical testing. Then termination fees in practice are examined. Finally, this study closes with limitations and suggestions for future research. Termination Fees A termination fee, also called a break-up fee, can be a beneficial tool for companies undertaking some form of M&A activity. Originally, termination fees were designed as payments made by an acquiring company to a target company in the event that the deal was not completed (Flanagan et al., 1998). This is due to M&As taking significant time, money, and effort from both the acquirer and target because of the steps required prior to an M&A deal completing. In addition, M&As can cause disruptions to employees and customers due to the uncertainty that occurs. Termination fees serve to mitigate, allocate, and address the ramifications of deal risk (Afsharipour, 2010). M&As between publicly traded companies have the highest potential for a deal to fall apart because of the potentially lengthy period between the announcement of the deal and the actual completion of the transaction. Therefore, termination fees serve as a way to mitigate deal risk as millions of dollars are at stake for both the target and acquiring companies, as well as their shareholders and other stakeholders (Miller, 2007). In order to alleviate the potential risks associated with a M&A transaction that fails to be completed, termination fees are used to lessen some of the costs resulting from the phase before a deal is completed. The costs that may be accrued during this phase include loss of customers, employee turnover, time, judiciary and legal expenses, and most importantly the loss of inside information about a firm involved in the transaction. 1

This study focuses on termination fees, not reverse termination fees. JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

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M&A: TERMINATION FEES AND ACQUISITION

In addition to these costs, uncertainty can increase among employees, customers, suppliers, and other key stakeholders. Furthermore, the presence of a termination fee can be a signal from the acquiring firm of its level of commitment to the deal. The message that a termination fee sends to the shareholders and the public can vary based on the size of the fee. Generally speaking, the higher the termination fee, the greater the commitment made by the parties involved in the transaction. However, fees need to be reasonable and it has been suggested that these fees should fall within three to four percent (Fox et al., 2012). More recently, a new trend has emerged in termination fees. Often referred to as reverse termination fees, these are fees that the target must pay toward the buyer in the event the transaction is not completed (Sekhon, 2010). Frequently these fees exceed the traditional break-up fee and fall into the five to twelve percent range of the deal size (Sekhon, 2010). While reverse termination fees are not quite as prevalent as the traditional termination fees, they are on the rise (Afsharipour, 2009). Termination fees, however, are not a guarantee that either party in an M&A will be financially satisfied in the event a deal does not reach completion. As mentioned in the introduction, when two publicly traded companies are going through an M&A, there can be a lengthy interval period. This longer interval period can lead to some potentially adverse changes for the target. This is called a Material Adverse Effect (or Material Adverse Change, MAC) and occurs as “during this period, the business of the acquired company may deteriorate, thus raising the question of whether the counterparty must perform on the agreement and pay the purchase price” (Miller, 2007: 2007). Under a MAC, companies are able to terminate the M&A without penalty, or they can renegotiate the terms of the original M&A agreement. Herman and Piereck explain the MAC concept further: The MAC concept is used throughout merger agreements to qualify representations and warranties, in some form to qualify covenants that operate between signing and closing, and as a condition to the buyer’s obligation to consummate the deal. Because the buyer’s closing obligations are typically conditioned on the absence of a MAC – whether through the representation and warranty bring-down or a stand-alone MAC condition – buyers have the ability to terminate or renegotiate the terms of a transaction by claiming the occurrence of a MAC following events that adversely affect the target’s business between signing and closing. (2010: 1) Companies need to be careful claiming a MAC, however, as they have to go to court to argue their position, which can be quite costly. Some acquiring companies have utilized the MAC clause to walk away from a deal because the target became less attractive during the interval period (Herman and Piereck, 2010). The MAC clause details, however, need to be spelled out quite carefully in the M&A agreement. MAC clauses are one such way to attempt to avoid the payment of a termination fee. Empirical Examination of Termination Fees and Deal Completion As mentioned previously, there has been limited research on termination fees. Studies performed by Bates and Lemmon (2003) and Officer (2003) have found that the inclusion of termination fees positively affects the completion of M&As. More recently, JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

2005

2006

74

Total Number of Deals

2.76

2.95

6

3.25

3.16

Terminated Mergers

3.21

3.15

79

7

72

193.3

165.33

68

169.68

92.41

171.80

6906.14

7282 98.33

6129.55

6198.36

2856.89

3215.69

Successful Mergers

Term. Fee for Successful Mergers Term. Fee for Terminated Mergers Average Termination Fee Percentage Avg. Term. Fee % for Successful Mergers Avg. Term. Fee % for Terminated Mergers

Total Termination Fee Amount

Deal Amount for Successful Mergers Deal Amount for Terminated Mergers

Total Deal Amount

42

9

33

3.10

3.16

3.17

250.69

78.26

115.21

8044.44

3177.87

4220.71

2007

36

7

29

2.02

3.04

2.84

115.43

143.41

137.97

4903.21

4604.03

4662.21

2008

Table 1 Descriptive and Summary Information 2009

20

4

16

2.07

3.64

3.41

21.84

508.44

435.45

1921.67

9343.41

8230.15

2010

49

6

43

2.00

3.79

3.56

23.98

110.40

100.12

1068.5

3320.24

3058.39

Total

300

39

261

2.50

3.32

3.21

144.07

147.42

146.98

5575.22

4482.01

4624.13

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Jeon and Ligon (2011) have examined the size of these fees. They broke the fees into low, medium, and high categories. Their findings indicate that medium-sized termination fees may serve as the efficient contractual devices, while larger fees are less beneficial to shareholders.


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This study contributes to these findings with a collection of M&A deals that occurred between 2005 and 2010. 2 Utilizing the Wall Street Journal, information regarding U.S. publicly traded firms acquiring other U.S. publicly traded firms 3 was collected. A total of 300 M&A deals were identified for use in this study. Out of the 300 M&A deals, 291 included a termination fee, while only nine did not include such fees. The average termination fee size of the 291 deals that included termination fees was 3.21% or $146.98 million. Table 1 outlines the summary and descriptive information regarding the sample utilized in this study. In order to examine the effects of termination fees on deal completions, a set of control variables were chosen. The year of the announcement was used to control for any influence of economic shifts (Quinn, 2010). Relative size was measured as the total assets of the target firm divided by the acquiring firm total assets. Previously, Hoffmeister and Dyl (1981) found that target firm size had an impact on deal completion. Relative size allows for a better comparison of target firm compared to the acquiring firm. Acquisition relatedness was utilized as it was found to increase the likelihood of a deal being completed (Flanagan et al., 1998). Acquisition relatedness was modeled by using Haleblian and Finkelstein’s (1999) continuous measure. Termination fee, the independent variable in this study, was measured as a percentage of the termination fee to the deal size. Logistic regression was utilized to examine the effects of termination fees on M&A deal completion. The findings indicate that as the termination fee increases, the likelihood of the deal completing increases significantly. These results echo those of other studies on termination fees (e.g., Jeon and Ligon, 2011). Table 2 depicts the findings of the logistic regression analysis.

Table 2 Results of Logistic Regression Analysis Variable Year Relative Size Acquisition Relatedness Termination Fee Cox and Snell R2 Nagelkerke R2 Chi-square

Coefficient (Ⱦ) -0.202† -0.153 0.021 0.581**

Odds Ratio 0.817 0.858 1.021 1.789

0.09 0.17 27.01**

Classification: Overall 88.4% † = p < 0.10; ** = p < 0.001; n = 300

2010 was used in order to leave enough lag time to determine whether a deal had been completed or terminated. 3 U.S. publicly traded companies were used in order to access information regarding termination fees that are filed with the SEC. 2


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Of the 300 M&A deals in the sample, 261 (87%) were successfully completed and 39 (13%) were terminated. In addition, only nine (three percent) of the deals did not include a termination fee. In the nine M&A deals that did not include termination fees, five (55.5%) were terminated and only four (44.4%) were successfully concluded (see Table 3). These findings are similar to the findings of Jeon and Ligon (2011). They too found a higher likelihood of deals not being completed when termination fees were not present, compared to deals that included termination fees. This anecdotal evidence indicates that the presence of termination fees in M&A agreements makes it more difficult for both parties to walk away from completing the transaction.

Table 3 M&A Activity 2005-2010 Terminated Mergers

Number of Deals

Successful Mergers 39

300 200 100 0

6

7

68

72

261 9 33

7 29

4 16

6 43

Year

In addition to the evidence above, the data suggests that higher termination fees also lead to higher M&A completion rates. In Table 4 below, it can be seen that in those deals that did get terminated, the termination fees were lower than the deals that were completed. For those deals that were completed, the average termination fee was 3.38%, whereas those deals that were terminated, the average fee was 2.81%, or roughly $144 million. This indicates that when the fee is too low, it may make it easier for managers from both parties to walk away, or easier for a competing bidder to enter the fray.



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Table 4 Aggregated Termination Fee Percentages by Category

Termination Fee in Percentage

Aggregated Termination Fee Percentage

4.00

3.38

3.21

Average Termination Fee % 2.81

3.00 2.00 1.00 0.00 Total 300 Deals

Completed 261 Deals

Terminated 344 Deals

Avg. Term. Fee % for Successful Mergers Avg. Term. Fee % for Terminated Mergers

4

The utilization of termination fees in M&A transactions has been increasing substantially over time, suggesting that managers find these provisions to be beneficial. As noted earlier, in 1989 it was found that only roughly two percent of all deals included a termination fee provision (Bates and Lemmon, 2003), and by 2007, 87.5% of all deals included termination fees (Jeon and Ligon, 2011). This study found that in the deals published in the Wall Street Journal, 97% of the M&A deals included termination fees. These findings, when taken together, should ensure that managers involved in a merger or acquisition examine their termination fee clauses quite carefully. If the fee is too low or there is no fee, it makes it easier for both parties to walk away. These implications are discussed below. Termination Fees in Practice As the empirical evidence indicates above, the presence of termination fees greatly increases the likelihood of an M&A deal being completed. There are caveats to this, however. It was found that when termination fees are too low (approximately 2.8% of the deal amount), the chances of the deal being terminated increases. Without termination fees at all, the odds of a deal not being completed increases substantially. Therefore, if management is committed to making the acquisition, imposing a 4

Five deals were removed that did not include any termination fees as to not skew the average. JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

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reasonable termination fee signals to both shareholders and management of the increased interest in acquiring the company. Building from findings of previous studies, and from the sample set in this study, establishing a termination fee within the 3.2-3.4% range of the total deal amount is recommended. Within this range, the likelihood of deal completion increases as a result of having more “skin in the game.” Therefore, it is suggested that managers undertaking a merger or acquisition should carefully consider the size of the termination fee based on their level of interest in acquiring the target firm. M&A transactions that lack the presence of a termination fee are left open to a variety of potential negative outcomes. For example, in 2009 IBM tried to acquire Sun Microsystems and no termination fee was negotiated. After significant due diligence, IBM tried to lower their offer for Sun Microsystems, which led the Board of Directors for Sun Microsystems to balk at the deal. This hesitancy by Sun’s board led to IBM withdrawing the offer. Ultimately, Sun Microsystems was acquired by Oracle, but at a much lower price of $5.6 billion compared to IBM’s original offer of $7 billion. In addition to being more easily able to walk away from a deal, termination fees that are too low or non-existent may open the door for other bidders (Officer, 2003). While this may be ideal for the target firm’s shareholders, this may work against the acquirer that is attempting to make a strategic acquisition for synergistic reasons. For example, in its attempt to acquire Sprint in 2012, Softbank imposed a termination fee upwards of $600 million in the event Sprint terminated the transaction. This was well under the recommended 3.2% and opened the door for Dish Network to enter into the process in 2013. In other cases, termination fees should be explicitly detailed in the event an occurrence that is outside the control of either party. For example, due to possible antitrust violations, AT&T was not able to complete the acquisition of T-Mobile in 2011. In an M&A transaction that could be subject to governmental review, or some other force outside the control of either party, a clause in the M&A agreement should include verbiage related to a different valuation for the termination fee (e.g., legal expenses only). In the case of the AT&T and T-Mobile acquisition, AT&T was subject to a total value of $4 billion in termination fees payable to T-Mobile. In addition, the $4 billion termination fee was approximately 10% of the total deal amount. This fee far exceeds the 3.2-3.4% range suggested. A termination fee of roughly 10% of the transaction amount could be a strong indication of managerial hubris. This kind of hubris is damaging to not only the organization by depleting the levels of cash-on-hand, but also to the shareholders of the organization. In addition, the CEO of AT&T, Randall Stephenson had his compensation cut by approximately $2 million over the costly, failed takeover attempt (Cowley, 2012). As a result of all the possible issues associated with the failed completion of an M&A, it is imperative for managers to carefully craft and consider the termination fee in the event of a failed takeover attempt. The impact of a failed takeover attempt can have further reaching implications than simply the deal not completing, as in the case of the CEO for AT&T. Therefore, managers involved in M&As should carefully craft the termination fee section of a merger agreement.


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Limitations and Suggestions for Future Research This paper should also be viewed in terms of its limitations. One facet is to look at additional variables that affect deal completion. For example, a hostile takeover attempt could affect deal completion. However, hostile takeover attempts are less likely to utilize termination fees given the nature of the takeover attempt. Also, examining how the M&A transaction is to be paid for is another avenue to include in future research (Flanagan et al., 1998). Another limitation of this study is the nature of the data being cross-sectional. Further research should examine deals in more detail. Specifically, a deeper examination of why deals failed when termination fees were present is one such avenue for future research not addressed here. In addition, this paper only examined termination fees. As there is an increase in the utilization of reverse termination fees (Quinn, 2010), more research should examine the impact of these fees on M&A deal completion. Another limitation in this study is that the rationale for deal termination was not examined. This is an avenue that could use further exploration. For example, given the interval period between the announcement of a deal and the actual deal being completed, the MAC can be invoked in order for a company to avoid paying a termination fee. Also, a competing bidder may have intercepted the deal and picked up the termination fee, if present. Finally, as mentioned with the example with AT&T, government intervention could play a role as to why a deal was terminated. While the AT&T example was one of the U.S. government intervening, there are other cases where foreign governments may also get involved with regards to not approving a deal, thus ending in termination. 5 Therefore, further research should be explored on why deals get terminated and the impacts on payouts of termination fees should also be explored. While this paper has taken a more practitioner-oriented stance on the presence of termination fees, much research is still needed to unlock whether the presence of termination fees are beneficial. Although research shows that the presence of termination fees has improved the successful completion of M&As, future research should examine whether this is actually useful for firms. For example, with such a high failure rate in completed M&As (King et al., 2004), is improving the chances of their completion actually improving acquisition performance, or is it hurting it, as more deals are being forced to completion? In addition to examining post-acquisition performance, future research on how termination fees have spread from the paltry two percent in 1989 (Bates and Lemmon, 2003) to the nearly 97% found in the study is needed. Is there an institutional theory logic (mimetic isomorphism) (DiMaggio and Powell, 1983) that has driven this advancement in the utilization of termination fees, or is there some other phenomenon driving this adoption? Studies have suggested that reverse termination fees were more widely adopted during the credit crisis (Quinn, 2010) and fueled by private equity firms (Sekhon, 2010). Another avenue of future research would be to explore the differences between mergers and acquisitions and termination fees. The sample in this study was split based on a relative size ratio of above and below 0.9. As the relative size, measured by target total assets divided by acquirer total assets, approaches one, this could be indicative of a 5

Thank you to the reviewers for this addition to the study. JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

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“merger of equals.” The average termination fee percentage for these “merger of equals” was 2.94%, whereas those below the 0.9 cutoff were 3.24%. This does indicate that differences are present between potential “merger of equals” and what may be considered more of an acquisition. Therefore, it is suggested that future research look more in depth into whether differences exists between mergers and acquisitions and why do they exist. Future research should also examine those firms that have received compensation from M&A transactions that were terminated. How have these terminated M&As affected their post-termination performance? Has the payment of termination fees hindered or helped these firms after the deal was terminated? Building further off of this idea, do those firms that are highly related become more competitive in their industry after receiving the termination fee? The implications from the prior research and this study on termination fees are that much exploration remains, in particular from a managerial perspective. While the prior literature has better helped with the understanding of termination fees, reverse termination fees, and impact on deal completion, there are still a multitude of areas requiring further exploration. This is particularly true because of findings suggesting that M&As often fail to achieve the financial expectations of them (King et al., 2004). It is hoped that this study has provided guidance to academics on future paths for exploration on termination fees. In addition, practitioners should be wary of these fees and carefully craft these fees when undertaking an M&A.

References Afsharipour, A. 2010. “Tranforming the Allocation of Deal Risk through Reverse Termination Fees.” Vanderbilt Law Review 63: 1161-1240. Afsharipour, A. 2009. “Paying to Break Up: The Metamorphosis of Reverse Termination Fees.” Retrieved from http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1443613. Bates, T. and M. Lemmon. 2003. “Breaking Up is Hard to do? An Analysis of Termination Fee Provisions and Merger Outcomes.” Journal of Financial Economics 69: 469-504. Cowley, S. 2012. “AT&T CEO Pay Docked $2 Million for T-Mobile Debacle.” http://money.cnn.com/2012/02/22/technology/att_ceo_pay/ DiMaggio, P. and W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48: 147-160. Flanagan, D., J. D’Mello, and K. O’Shaughnessy. 1998. “Completing the Deal: Determinants of Successful Tender Offers.” Journal of Applied Business Research 14: 21-32. Fox, D., D. Wolf, D. Feirstein, and J. Zachariah. 2012. “Breakup Fees – Picking Your Number.” The Harvard Law School Forum on Corporate Governance and Financial Regulation: http://blogs.law.harvard.edu/corpgov/2012/09/11/breakup-fees-pickingyour-number/. JOURNAL OF MANAGERIAL ISSUES Vol. XXVI Number 1 Spring 2014

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Haleblian, J. and S. Finkelstein. 1999. “The Influence of Organizational Acquisition Experience on Acquisition Performance: A Behavioral Learning Perspective.” Administrative Science Quarterly 44: 29-56. Herman, A. and B. Piereck. 2010. “Revisiting the MAC Clause in Transaction. What Can Counsel Learn from the Credit Crisis?” Business Law Today: 1. Hoffmeister, J. and E. Dyl. 1981. “Predicting Outcomes of Cash Tender Offers.” Financial Management 10: 50-58. InvesterPlace staff. 2012. http://investorplace.com/2012/01/2011-merger-acquisitiondealmaking-deals-buyout/ Jeon, J. and J. Ligon. 2011. “How Much is Reasonable? The Size of Termination Fees in Mergers and Acquisitions.” Journal of Corporate Finance 17: 959-981. King, D., D. Dalton, C. Daily, and J. Covin. 2004. “Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators.” Strategic Management Journal 25: 187-200. Miller, T. 2007. “The Economics of Deal Risk: Allocating Risk through MAC Clauses in Business Combination Agreements.” William and Mary Law Review 50: 2007-2103. Officer, M. 2003. “Termination Fees in Mergers and Acquisitions.” Journal of Financial Economics 69: 431-467. Quinn, B. 2010. “Optionality in Merger Agreements.” Delaware Journal of Corporate Law 35: 789-828. Sekhon, V. 2010. “Valuation of Reverse Termination Options in Mergers and Acquisitions.” Berkeley Business Law Journal 7: 72-101.


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The Advantages of High-Prestige MBA Degrees and Placement Centers for Compensation Growth of African Americans ............................................................. 7 Brooks C. Holtom, Edward J. Inderrieden, and David A. Kravitz

108

Many in society are asking searching questions about the costs and benefits of university education and MBA education in particular. Moreover, the role of education in promoting equal opportunity is being examined. One factor of particular interest to careers researchers and educators is the use of career placement centers especially as regards their role in promoting minority advancement. In testing a sample of over 7,000 registrants for the Graduate Management Admissions Test, clear evidence emerged that earning an MBA results in higher income, an effect that is even greater if one attends a top-tier school. But most importantly for this study, the data indicated that blacks are advantaged in the job search and match process by working with career placement centers. Thus, while schools are likely to continue to encourage all students to actively engage with on-campus career centers, they should reach out to black students in particular to maximize the benefits these centers provide. Finally, organizations seeking to obtain minority talent are well advised to work through MBA career centers.

Searching Inside and Out: Organizational Identification Relationships and 132 Information-Sourcing among Managers and Knowledge-Workers ........................... 22 Amy Guerber, Iris Reychav, and Vikas Anand

This paper, examines the effect of three forms of organizational identification relationships – identification, disidentification, and ambivalent identification – on information-sourcing from within one’s work unit and outside the firm. Data obtained from three diverse Israeli firms indicate that identification increases the likelihood that individuals will source information from both within the work unit and outside the organization, and disidentification has a curvilinear relationship with external information-sourcing and no effect on internal informationsourcing. Ambivalent identification positively influences external information-sourcing but not internal information-sourcing. Additionally, results show that the effects of identification on external informationsourcing are more pronounced for non-managers than for managers.

Mergers and Acquisitions: Termination Fees and Acquisition Deal Completion .............. 44 Frank C. Butler and Peter Sauska Companies undertake mergers and acquisitions (M&A) to create synergies from cost savings and/or revenue enhancement. The process of acquiring a (5)

firm, however, is costly, complex, and time-consuming. Therefore, many companies utilize termination fees, a fee paid in the event an M&A deal is not completed, to offset some of the costs accumulated during the preacquisition process. This paper addresses termination fees and their impact 154 on M&A completion rates while also discussing the potential impacts these fees can have on the various stakeholders of an organization. Utilizing data collected on 300 firms, the findings indicate that M&A completion rates are affected by the size of the termination fees. These results suggest that deals with fees below 3.2% of the M&A deal amount are more likely to be terminated. However, deals that exceed the upper recommended bound of 3.4% are also subject to a different set of issues. Advice to both practitioners and scholars on the utilization of termination fees in M&A is also discussed.

Competitive Action Repertoires and Stock Risk ........................................................... 55 Margaret Hughes-Morgan and Walter J. Ferrier

Drawing from core ideas in competitive dynamics and information processing theory, this study explores the relationship between competitive strategy and stock risk. It is predicted that three properties associated with the firm’s competitive action repertoire – conformity, stability, and simplicity – influence investors/observers’ information processing fluency which, in turn, influences stock risk. The hypotheses are tested on a sample of market-leading firms across multiple industries over a seven-year time panel. Findings suggest that firms with lower levels of stock risk carry out competitive action repertoires that are similar to that of rivals, familiar to 172 investors, and simple.

An Integrative Model of Diffusion and Adaptation of Executive Pay Dispersion ............ 70 Yong-Yeon Ji and Won-Yong Oh

This study proposes a new determinant of executive pay dispersion by integrating two distinct mechanisms: inter-firm diffusion and intra-firm adaptation. Based on institutional theory (diffusion) and group development framework (adaptation), this study assesses the similarity between the pay dispersion change at tied-to firms (i.e., where compensation committee members serve as executives) and their focal firms (i.e., where they serve as board of directors). This study based on a sample of U.S. banks provides evidence for “diffusion” because their change (either increase or decrease) of executive pay dispersion at tied-to firms results in a change of pay dispersion at the focal firm in the following year. This study also provides evidence of “adaptation,” as the extent to which pay dispersion practices are diffused across firms is contingent upon the length of shared tenure among committee members.

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