Behavioral merger and acquisition pricing: Application to Verizon mergers with AOL and Yahoo

• Author: Nipun Agarwal,Paul Kwan,David Paul
• Date: 01 January 2018
• Published date: 01 January 2018
• DOI: http://doi.org/10.1002/jsc.2176

RESEARCH ARTICLE

DOI: 10.1002/jsc.2176

Strategic Change. 2018;27(1):9–21. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 9

Abstract

Mergers and acquisions (M&A) are important to companies as it allows them to acquire capabili-

es that they cannot create internally and to grow quickly. M&A transacon pricing relates to the

pricing of these M&A deals and this arcle analyzes if behavioral nance factors like risk aver-

sion, opmism, and loss aversion have an impact on this pricing. Prospect Theory and Cumulave

Prospect Theory are applied to an agent‐based model to solve this problem. Results of this arcle

show that M&A transacon price does respond to a change in risk aversion and opmism traits

of the acquirer and target companies respecvely, as well as, loss aversion and certainty (prob-

ability of gains and losses). When, the acquirer is risk taking and target company is opmisc, the

M&A transacon price increases. However, with increasing certainty of gains and reducing loss

aversion (increasing loss aversion co‐ecient; as gains are perceived to have the same weight as

losses), the M&A transacon price seems to reduce. These results are compared with the recent

mergers of Verizon and AOL as well as Verizon and Yahoo, to understand if these results would

occur in pracce. Analyzing these mergers, it seems that the outcomes from this model does

provide insight on the pricing of these M&A transacons. This arcle also analyzes how these

behaviors would impact the pricing when three dierent acquirers are trying to take over a target

company. Results show that loss aversion has a signicant eect on this pricing with risk aver-

sion and opmism also having some minor impact. But, the existence of mulple acquirers does

posively increase the M&A transacon price.

1 

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 INTRODUCTION

Mergers and acquision (M&A) are a signicant part of the strategy

of leading companies globally. It is oen hard to build industry lead-

ing capabilies within a company. So, leading companies like Google,

Facebook, Apple, Verizon, and others have acquired companies to

obtain these capabilies. As a result, there are numerous M&A trans-

acons that occur during every business cycle globally. An important

part of an M&A transacon for an acquirer is to make sure they do

not pay too much to acquire the target company. While, the target

company shareholders want to get as much as possible for the sale

of the company. Therefore, M&A transacon pricing is an important

aspect of undertaking such a transacon. At present, M&A transacon

pricing is done using nancial modeling techniques like discount cash

ow analysis, industry mulples, and similar methods. However, these

techniques do not consider behavioral implicaons that may impact

the transacon pricing. Behavioral nance literature shows that these

factors are important; for example, Kahneman and Tversky (1979) who

started this discussion on behavioral nance explain risk aversion can

have an impact on the way humans treat gains and losses. Baker, Pan,

and Wurgler (2009) provide empirical evidence that shows how psy-

chological factors can be important to M&A transacon pricing. They

undertake an empirical study that shows that shareholders of target

companies will usually support oers that meet the 52‐week high

stock price of the target company.

This arcle intends to develop an agent‐based model to analyze

M&A transacon pricing while considering three specic behavioral

factors that relate to risk aversion, opmism, and loss aversion. This

is specically undertaken by applying the learning from Prospect

Theory (Kahneman & Tversky, 1979) and Cumulave Prospect Theory

Behavioral merger and acquision pricing: Applicaon

to Verizon mergers with AOL and Yahoo*

Nipun Agarwal | Paul Kwan | David Paul

University of New England, Armidale, NSW,

Australia

Correspondence

Nipun Agarwal, School of Science &

Technology, University of New England,

Armidale, NSW, Australia.

Email: nipun1@msn.com

* JEL classicaon codes: G3, G34, G4.