Abstract
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.
Highlights
The price that a bidding firm offers for a target is generally the outcome of a negotiation with the target’s board
Having documented that multiple reference points matter, we focus on the 52-week high for simplicity
Boone and Mulherin (2007) show that on the order of half of targets are sold in a competitive auction process that takes place prior to the first public offer; in other words, we often observe the outcome of that process.) The success of the offer itself, while clearly endogenous as we show later, provides an interesting sample split
Summary
The price that a bidding firm offers for a target is generally the outcome of a negotiation with the target’s board. In arguing for acceptance of the offer from the family which already controlled the company, Cablevision management highlights the fact that the bid price is at a premium to a variety of 52-week high and low prices, an appeal both to anchoring as an estimate of value and reference point utility These anecdotes give some suggestive color to the salience of reference points to target agents and the media and the contexts in which they are employed. This explanation holds that the 52-week high price is relevant because it represents a specific valuation that the bidder could hope to obtain by returning the target to “optimal” investment policy, where optimal is defined as the policies prevailing as of the time the high was reached, even in the absence of any synergies This explanation seems inconsistent with the evidence on the importance of incremental peaks shown before. In light of the strong results both for recent years and within large firms, the empirical effects seem to be of ongoing economic importance
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