What Will it Do for My EPS? An Unflattering But Powerful Motive for Mergers
53 Pages Posted: 6 Jun 2010 Last revised: 6 Jan 2014
Date Written: December 20, 2013
There is widespread evidence that bidders are more highly valued than their targets, and that both parties tend to be in temporarily high-valued industries. We find that valuation differences are also uniquely important for predicting who will be acquired and when. A firm is more likely to be a target when others in the industry could acquire them in a stock-swap merger that appears accretive to the buyer even after paying a substantial premium. The resulting measure is related to the dispersion of valuation multiples within an industry, but is grounded in a specific model of managerial behavior and is empirically much stronger than dispersion. Indeed, it is a stronger target predictor than any measure in the existing literature, including recent industry-level merger activity. Our results for bidders are less impressive. We find that a firm is more likely to be a bidder when it has more accretive targets, but unlike target prediction our effects are subsumed by existing size and valuation measures in the literature.
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