Locking out rival bidders: The use of lockup options in corporate mergers

Conventional wisdom suggests that lockup options are granted by self-interested target managers to discourage competition and hand-select an acquirer, thus harming target shareholder wealth. Evidence from 2,067 deals announced during 1988-1995 suggests that lockup options inhibit competition, but on average, deals with lockup options have higher target announcement and overall returns and lower bidder announcement returns, even after controlling for shareholder anticipation and other factors. An examination of 100 merger proxies suggests lockup options are no more prevalent in privately negotiated, preemptive deals, and average target returns are higher when such deals include a lockup option. The overall evidence is more consistent with managers using lockup options to enhance bargaining power than with lockup options harming shareholder wealth. (C) 2001 Published by Elsevier Science S.A.