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

See all articles by Gerald T. Garvey

Gerald T. Garvey

Blackrock

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Kangzhen Xie

Seton Hall University, Stillman School of Business

Date Written: December 20, 2013

Abstract

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.

Suggested Citation

Garvey, Gerald T. and Milbourn, Todd T. and Xie, Kangzhen, What Will it Do for My EPS? An Unflattering But Powerful Motive for Mergers (December 20, 2013). Available at SSRN: https://ssrn.com/abstract=1620544 or http://dx.doi.org/10.2139/ssrn.1620544

Gerald T. Garvey (Contact Author)

Blackrock ( email )

Level 37, Chifley Tower
2 Chfiley Square
Sydney, NSW 2000
Australia
+61 2 9272 2388 (Phone)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Kangzhen Xie

Seton Hall University, Stillman School of Business ( email )

South Orange, NJ 07079
United States

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