Tuesday, December 8, 2009
Baker, Pan, and Wurgler have a new paper, A Reference Point Theory for Mergers and Acquisitions. They suggest that initial offering prices are important for determining the ultimate success of an offer. In particular, they point to the 52-week high heuristic. If an offer price is close to the target's 52-week high (notwithstanding the fact that past prices, don't say much about the future, synergies, whatever), the offer is more likely to be successful. They find a 10% increase in the 52-week high is associated with as much as a 3% increase in the likelihood that a target will accept the offer. in the offer premium. That's an interesting, and totally reasonable, observation. Of course, you can imagine how making an offer close to the highest price range over the past year (the reference point) will set the table for friendly negotiations. Boards and managers are also able to easily access the value of the 52-week high, so it makes for a convenient reference point when evaluating initial offers.
Abstract: The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.