The Effect of Prohibiting Deal Protection in M&A: Evidence from the United Kingdom

Abstract

Since 2011, the U.K. has prohibited all deal protections – including termination fees – in M&A deals. Prior to 2011, the U.K. permitted termination fees up to 1% of deal value and there was no prohibition on other protection devices. We examine the effect of this regulatory change on deal volumes, the incidence of competing offers, deal jumping rates, deal premiums, and completion rates in the U.K., relative to the other European G-10 countries. We find that M&A deal volumes in the U.K. declined significantly in the aftermath of the 2011 Reforms, relative to deal volumes in the European G-10 countries. We find no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids. Completion rates and deal jumping rates also remained unchanged. We estimate that the incidence-rate ratio of U.K. deals to non-UK deals after the reform was approximately 50% the incidence-rate ratio of U.K. deals to non-U.K. deals prior to the reform. In addition, we estimate USD 19.3 billion in lost deal volumes per quarter in the U.K. relative to the control group due to the 2011 Reforms, implying a quarterly loss of USD 3.2 billion for shareholders of U.K. companies. Our results suggest that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals.