Market Valuation and Merger Waves

TLDR

The paper questions whether valuation affects mergers, noting that the naive view that overvalued bidders use stock is incomplete because targets should not be eager to accept stock. The study investigates whether deviations between market and fundamental values on both sides of a transaction can rationally explain the correlation between stock merger activity and market valuation. The authors analyze how such market value deviations on both sides of the transaction can rationally lead to this correlation. Data show that periods of high market valuations are correlated with stock merger activity, and that merger waves and cash/stock purchase waves can be rationally driven by over‑ and undervaluation, indicating that valuation fundamentally impacts mergers.

Abstract

ABSTRACT Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naïve explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over‐ and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers.