If you're trying to figure out what bid will motivate a target company to sell, you may want to spend less time analyzing discounted cash flows and more time considering a single number: the target's 52-week high.
In a study of 7,500 public-company deals between 1984 and 2007, Malcolm Baker, a professor of finance at Harvard Business School, and his co-authors found that sellers (boards, management, and shareholders) stick to 52-week highs like warm gum to a shoe, regardless of how distantly that high point was reached. The study found that more deals were priced at that reference point than any other, and offers were more likely to be approved if they exceeded that high, even controlling for the level of the offer premium. In addition, the greater the difference between the 52-week high and the current stock price, the higher the premium that bidders paid for companies.
Selling at the 52-week high offers some protection for boards worried about being sued for not negotiating a fair price, notes Mark Sirower, a principal at Deloitte Consulting and author of The Synergy Trap. But it can be problematic for buyers. Indeed, Baker's research shows the bidders' shareholders tend to drive down their stock prices more than average when a bid ostensibly driven by the 52-week high is announced.
This all augurs continued weakness in deal-making, says Professor Baker. In the second quarter, M&A deal volumes in North America were off 56% year-on-year, and dollar value fell 61%, according to Mergermarket. "When companies are trading well off their highs, it's harder to agree to terms on a new deal, even if the underlying economic rationale is good for both parties," Baker says. Private-equity firms are also clutching assets tightly. "They believe the prices they could get today are multiples below what they can realize if they hold through this cycle," says Jeffery Bistrong, a managing director at Harris Williams & Co.
To make deals happen, experts say that acquirers need to dig deeper than the 52-week high in order to understand price anchors. "You need to look at who the key influencers are, when they bought in and at what price, and thus what their cost basis and [internal rate of return] are to date," says Justin Pettit, a partner with Booz & Co. They also counsel patience. "Prepared" acquirers have well-stocked pipelines, Sirower says, and seldom paint themselves into a corner by "having to do a deal right now."
There is one beneficial aspect of the 52-week-high fixation: it's a moving target. As it rolls forward it may well bring a new, lower price point into play.