Labor contract is often used as a risk-sharing mechanism between firms and employees. From acquirer’s perspective, cost saving is both a driver of making deals and a major source of deal synergies. From target’s perspectives, implicit labor contracts require firms to maintain their risk-taking levels otherwise they need to compensate employees more. Takeovers are often followed by layoffs of workers. Therefore, it is possible that whether to accept takeover offer will be included in the implicit agreement. However, little is known about how potential unemployment benefits to laid-off workers affect a firm’s likelihood of being acquired and the synergy of the deal. We exploit changes in state unemployment insurance laws as a source of variation in labor unemployment benefits. From target firms’ perspective, we find that higher unemployment benefits increase the likelihood of firms being acquired, particular for labor intensive firms, firms with high unionization rate, and firms with higher spending on corporate social responsibility. Moreover, we find that labor unemployment benefits affect the synergy of the M&A deals, both the bidder’s announcement returns and the combined bidder and target firm’s announcement returns are higher when the target firm’s state unemployment benefits are higher. Our findings suggest that labor unemployment benefits have a significant impact on takeover outcomes and state unemployment insurance laws have an unintended consequence on takeovers.