Two-Stage Acquisitions and Deal Premiums

Between 1990 and 2015, the fraction of M&A deals in which an acquirer obtained a minority stake in the target firm before making a majority stake offer amounted to almost 20% of the global public M&A volume. This paper investigates how such a two-stage acquisition strategy affects takeover premiums and merger gains. Using a treatment effects model for a global sample of M&A deals, I find that a two-stage acquisition strategy reduces information asymmetries and mitigates pre-emptive overbidding. I confirm these results for a US sample using the increase in trade secret protection across states as an exogenous shock to target value uncertainty and the reduction in import tariffs across industries as an exogenous shock to potential bidder competition. Overall, my results suggest that two-stage acquisitions can reduce frictions in the takeover process, resulting in more accurate deal premiums, higher acquirer and target shareholder returns, faster deal completion, and better long-run performance.