The effect of reference point prices on mergers and acquisitions (original) (raw)

The effect of reference point prices on mergers and acquisitions$Mergers Acquisitions

Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.

Behavioral Aspects of Merger Decisions: The Effect of Reference Prices on Bidders and Targets

2021

We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is positively correlated with the ratio of TAPP to the target’s pre-offer stock price; (2) TAPP dominates the institutional investor purchase price as an explanatory variable; and (3) the TAPP effect is additive and about equal in its magnitude to that of the pre-offer 52-week-high price. Our results indicate that reference prices affect merger deals primarily via adjusting the offer premium, and portray TAPP as a promising shareholder purchase-price indicator. * School of Business Administration, Bar-Ilan University, ISRAEL, and ECGI. E-mail: beni.lauterbach@biu.ac.il ** School of Business Administration, Bar-Ilan University, ISRAEL. E-mail: yevgeny.mugerman@biu.ac.il *** Monash Business School, Department of Banking and Finance, AUSTRALIA. E-mail: joshua.shemesh@monash.edu We have benefited from t...

Endogenous mergers: bidder momentum and market reaction

Applied Financial Economics, 2010

Recent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over(under)valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict U.S. mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In a second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.

Merger waves: Are buyers following the herd or responding to structural queues?

While there has been a significant amount of research covering the causes of merger waves, few papers have rank ordered merger waves based on the causes nor sought to determine which rationale leads to higher bidder payouts. This paper seeks to fill this gap by examining a cross section of large mergers across most industries occurring over a 17 year period. I find that merger waves over this period are caused foremost by changing economic and regulatory conditions. It is the behavioral rationale of mispricing, however, that more often leads to higher bidder payouts or merger premiums among acquirers in merger waves.

Merger bids, uncertainty, and stockholder returns

Journal of Financial Economics, 1983

This study investigates the effect of merger bids on stock returns. Abnormal stock returns are examined throughout the entire merger process for both successful and unsuccessful merger bids. The evidence shows that increases in the probability of merger benefit the stockholders of target lirms, and that decreases in the probability of merger harm the stockholders of both target and bidding firms. There is also evidence that the stock market forecasts probable merger targets in advance of any merger announcement, and because of this, previous studies have underestimated the market's reaction to merger bids.

Stock market bubble effects on mergers and acquisitions

The Quarterly Review of Economics and Finance, 2010

We investigate if and how mergers and acquisitions are affected by trends in the capital market, and particularly by a stock market bubble. Our main findings indicate that while the prevalence of M&A increased during the technology bubble, the pricing of M&A did not change. Moreover, the bursting of the bubble seems to have led to further cautiousness by investors, which extended throughout the years subsequent to the bursting of the bubble, even when prices on the exchange had rebounded. While we do not find robust evidence for changes in price multiples outside the exchange in concomitance with the changes on the exchange, we document changes in the information used by investors to value their targets. It seems that investors experienced a learning process in terms of the type of variables preferred, appearing to be more cautious since the bubble burst. This learning process investors undergo in concomitance to processes in the market seems to result in their being less affected by periodical or cyclical sentiments of euphoria and depression in the capital market.

The Anchoring Effect in Mergers and Acquisitions: Evidence from an Emerging Market

SSRN Electronic Journal

This article examines the presence of the reference price effect in mergers and acquisitions in Russia, which can act as a distortion in investor perception of the influence a deal has on a company. In this study we use the Russian market as a laboratory for the investigation of behavioral effects in a relatively inefficient market. We find a relationship between the acquirer's announcement period return and the proximity of its pre-announcement share price to the 52-week high. The 52-week high serves as a salient anchor even though it is economically irrelevant for valuation purposes. This effect appears to be stronger for deals associated with higher levels of uncertainty. The findings confirm the presence of the anchoring bias in evaluating the effect of a merger or acquisition announcement by Russian investors. We demonstrate a significant anchoring effect even for deals with a blocking (>10%) or a controlling stake (>25%) in an emerging market with a highly concentrated ownership.

Cash is King - Revaluation of Targets after Merger Bids

2012

Returns to merger announcements are commonly used to measure the expected value created by mergers. We provide evidence that a signi…cant portion re ‡ects, instead, a revaluation of the target. Using a sample of unsuccessful merger bids from 1980 to 2008, we show that targets of cash o¤ers are revalued by +15% after deal failure. Stock bids, on the other hand, do not seem to provide target information: targets with equity o¤ers revert to their pre-announcement levels after deal failure. The results are not driven by future takeover activity since cash targets are not signi…cantly more likely to receive future merger bids. The results are also independent of the speci…c type of reason for deal failure. Our …ndings, as well as the observed value changes in acquirers, are consistent with cash bids indicating target undervaluation while stock bids signal acquirer overvaluation.

The real effects of financial markets: The impact of prices on takeovers

The Journal of Finance, 2012

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect"). Our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats. DOES A LOW MARKET valuation make a firm a takeover target? In theory, if acquisition prices are related to market prices, acquirers can profit from taking over a firm whose market value is low relative to its peers-due either to mispricing or mismanagement-and restore it to its potential. Indeed, in practice, acquirers and other investors appear to track a firm's valuation multiples for indications on the potential for acquisition, and managers strive to maintain high market valuations to prevent a hostile takeover. Understanding whether such a link exists is important because, if so, this would suggest that the market is not a sideshow, but rather exerts a powerful disciplinary effect on firm management (as suggested by , , and Jensen ).