Reference prices, relative values, and the timing of M&A announcements

The bidder's relative value with respect to the target (RV) and its 52-week reference values affect who bids for whom as well as the timing of public announcement for bidder-target pairs that announce deals. Deals that are announced when the RV is near its 52-week high feature more stock payment, higher offer premium relative to the target's pre-announcement price but a larger discount relative to the target's 52-week high price, result in more negative announcement returns for the bidding firm in both the short and long run, and are less likely to be completed. Yet, bidders in such deals also experience large and positive abnormal returns over the period from private initiation of discussions with the target to twelve months after announcement. Our results suggest that bidders use past values of RV as reference points to assess relative misvaluation and to strategically choose announcement timing.