The Dividend Policy of the Merged Firm, Method of Payment, and Takeover Premium

Abstract

Dividends, particularly of acquiring firms are influenced by several structural adjustments especially after mergers. Using the dividend clientele hypothesis, we hypothesize that acquirer dividend policy is more likely to change after the merger if dividend policies of firms involved in a stock-based merger are quite different, while it remains unaffected in cash deals. Initially, we analyze the relationship between the acquirer dividends after the announcement and the pre-merger dividend policy of the target. In a second step, a multivariate analysis will be conducted to detect dynamics of takeover premium with the differences in dividend policy between merged firms. From the observation of 663 M&As, we find that acquiring firms are more disposed to adjust their dividend policies to those of targets in case of stock mergers than for mergers in cash. Additional analyses show some evidence that higher acquirer dividend is associated with higher takeover premium in cash deals, but there’s no significant association between difference in dividend policies and takeover premium in stock deals. These results highlight the role of the premium to offset the opportunity cost of target shareholders to receive more dividends in the merged entity when they agree a cash merger, and justify the triviality of the premium in stock deals by the disposal of the acquirer to adjust its dividend policy.