While companies seem to spend a lot of time and money on finding the proper valuation for the company being acquired during mergers and acquisitions, boards can increase their chances of getting the deal done and approved by focusing on one simply, and very public benchmark. Researchers at Harvard finds that the 52-week high of the stock price of the company being acquired seems to be what matters most when valuing a company during M&A negotiations (see WSJ article). As it turns out, regardless of data from other valuation measures and techniques, many boards will insist that any purchase price is at, or above the 52-week high. To make their case, researchers at Harvard looked at 7,500 deals from 1984 to 2007 and found that psychology and irrationality helped to drive price, and that the company's 52-week high stock price seems to be the starting point for valuation negotiations. In fact, approximately three-fourths of the deals studied were priced above the 52-week high (it should be more random), with those deals also having about the same three-fourths chance of getting shareholder approval. The findings may help to explain why many deals in hindsight seem to not work out for the acquiring company - who appear to be over-paying and/or buying at the high. For traders, the time honored tradition of selling on the news seems justified once in the trade, with the 52-week high helping to provide a reference point when considering risk and return before taking a position. For companies and boards, the most rational thing, as written by the WSJ, it to "use the market's irrationality to its advantage," and not let the opportunity pass. Just ask Yahoo!'s board.

As reported at the Financial Times, unsolicited bids for companies are running at their highest level in nearly a decade as companies use built-up cash, and in some cases a weaker dollar to acquire other companies. Data from Dealogic shows that since the start of the year, unsolicited bids have accounted for 19% of global mergers and acquisitions. This is the highest this number has been since 1999. As mentioned by the co-head of global M&A at Deutsche Bank, “The lack of credible white knights and activist shareholders pushing for quick resolutions and financing available for strategics is also fueling the high number of unsolicited bids”. Of interest is that the success rate of hostile deals has also increased, with only 31% of such deal failing in 2008, compared to an average failure rate of 42% since 1997. Apparently, activist like Carl Icahn are having an impact, Microsoft-Yahoo notwithstanding. On the other hand, given issues in the credit market, it could be that current deals going forward are more likely to have financing already in place and only include stable companies, thereby making a successful deals more likely. This news certainly provides a little better risk-reward for those trading on M&A news.

As highlighted in BusinessWeek, and illustrated by the recent acquisition of Anheuser-Busch by InBev, the United States is on sale. The weak stock market and even weaker U.S. dollar are allowing foreign buyers to purchase U.S. companies at discount prices. In the past five years, 2,331 U.S. firms with a total value of $772.3 billion were purchased by foreign buyers, according to data provider Capital IQ. In 2007, 614 U.S. firms, valued at $294.4 billion, were acquired by foreign entities, up from 541 deals valued at $155.1 billion for 2006, and 226 firms valued at $49.6 billion in 2003. While foreign buying slowed some with the slowing global economy in 2008, there has still been 266 foreign deals announced year-to-date valued at $121 billion.

Not surprisingly, bankers and M&A specialists expect the deals to continue and even accelerate if the dollar continues to be weak against the Euro. Foreign buyers also seem to have easier access to credit, compared to their American counterparts. Even those American companies who can obtain credit are less likely to do so given the uncertain economic environment. Who is next? It is difficult to tell, but the types of business purchased are being affected by the economy. Right now very stable businesses with good brands are being looked at. Companies similar to past and present takeovers, such as Anheuser-Busch, Genentech, Lucent Technologies, MedImmune, John Hancock, Commerce Bancorp, IPSCO, and the Thompson Corporation will be targets. If the economy were to improve, companies affected by the slowdown in the economy, and currently a little too risky given the environment, may also start to be considered, right at the point business starts to pick-up. Until the U.S. credit and housing problems are behind us, there may not be much some of these companies can do. Something to think about when you are having you next cold glass of InBev.