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Alexander Edwards

Professor, Joseph L. Rotman School of Management
University of Toronto

Private merger negotiation responses to ongoing tax legislation

Date: Friday, April 19, 2024
Time: 10:30 AM - 12:00 PM
Location: Bronfman building, Room 210

Abstract

Target valuation is the cornerstone of merger negotiations and hinges on expectations of future after-tax cash flows. But how do buyers and sellers adapt to expectation and incentive differences with respect to tax policies under development? Focusing on major corporate tax reform legislation in 2017 (i.e., TCJA) and using hand-collected data on private merger negotiations, we examine the contemporaneous impact of tax policy developments on those negotiations. For deals negotiated during tax legislation, the deal premium increases in the target鈥檚 expected gain from tax reform. Bidders and targets meet soon after key legislation events, especially when the target鈥檚 expected gain from reform is high. The pre-announcement bid revision following a legislative event in-creases in the target鈥檚 expected gains from reform and is greater for a bidder that faces a higher cost of delaying negotiations. Taken together, legislative developments appear relevant to the par-ties negotiating an acquisition.

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