In an acquisition, the target firm may demand compensation from the acquiring firm if the deal falls through. The acquiring firm's compensation is for the payment of a form of a real call option.

Question

Quizplus · Accepted Answer

This is known as a breakup fee or a reverse termination fee, and it is a common practice in mergers and acquisitions. The target firm may seek compensation for the costs and damages associated with the failed deal and the potential loss of alternative deals during the negotiation period. The compensation acts as a form of protection and incentivizes the acquiring firm to complete the transaction.

In an Acquisition, the Target Firm May Demand Compensation from the Acquiring