The target’s valuation is the cornerstone of merger negotiations and hinges on expectations of after-tax cash flows. But how do buyer and seller adapt when the underlying tax parameters are in flux? Focusing on the months-long legislation process behind major corporate tax reform in 2017 (TCJA) and exploiting hand-collected data on private merger negotiations, we examine in real time the impact of tax reform and its uncertainty on contemporaneous merger negotiations. Acquisition premiums negotiated during tax legislation are increasing in the target’s expected gain from tax reform. Tax legislation events are rapidly followed by new private merger negotiations, especially when the target’s expected tax reform gains are high. For deals negotiated during tax legislation, the magnitude of pre-announcement bid revisions are increasing in the target’s expected gains from the reform and driven by targets with more bargaining power. Our results provide new insight on takeover negotiation responses to material but uncertain tax policy events.

Edwards, Alexander and Heitzman, Shane and Klasa, Sandy and Todtenhaupt, Maximilian