When a public company goes up for sale, both the seller and potential buyer must come to agreement on price.
It turns out, according to recent research out of Harvard Business School, that this value determination is more a product of looking at previous stock prices than any detailed analysis of asset worth, cash flow or future prospects.
In fact, the sales price is often close to the 52-week high for the stock.
Looking at merger deals of 7,500 companies, researchers Malcolm Baker (Harvard Business School), Xin Pan (Harvard University) and Jeffrey Wurgler (New York University) found that three-fifths of the deals were priced around (mostly above) the 52-week figure. And 60 deals were priced exactly on that number.
In other words, psychology rather than rationality is behind some of the biggest business deals.
Surprised? Read all about it in the Wall Street Journal article, Key Number: The 52-Week High.
