A replication of "What will it do for my EPS?" : a straightforward but powerful motive for mergers

Abstract

The purpose of this paper is to investigate the possibility of predicting what firms ultimately become targets in a merger and acquisition transaction, by replicating the results of Garvey, Milbourn & Xie in “What Will It Do For My EPS” (2013). There are significant amounts of literature providing evidence that bidders are higher valued than their targets and that both parties in a takeover transaction tend to be in temporarily high-valued industries. Differences in valuation also indicate who will be an acquirer and when. The likelihood of being a target is higher when other firms in the industry can acquire the target using stock as consideration and if it has an accretive effect for the bidder, even when a significant premium is paid. We find that the number of viable accretive bidders, controlling for other measures in the existing literature, is identifiably a strong target predictor. The results when trying to predict likely bidders are however not as clear. A firm is likely to be a bidder when there are more viable accretive targets in the industry, but unlike target prediction these results are somewhat obscured by existing measures, especially those related to misvaluation. Our results on target and bidder prediction are in line with what the original paper finds. Like Garvey, Milbourn & Xie (2013), we identify that the likelihood of a merger being stock financed increases with the targets number of viable accretive bidders.