The impact of heterogeneous valuation on mergers and acquisitions

Heterogeneity of valuation for a firm implies an upwardly sloped supply curve for a firm's stock. This has several implications for mergers and acquisitions. Firms with greater heterogeneity are expected to have more steeply sloped supply curves. It is therefore expected that as heterogeneity increases, a target firm's shareholders must be offered a greater premium to induce them to sell.;Heterogeneity of valuation may affect other aspects of merger and acquisition activity, as well. Bidders should prefer to acquire low heterogeneity targets, ceteris paribus. If bidders do not consider heterogeneity in bidding, bids for high heterogeneity targets are expected to fail more frequently than bids for low heterogeneity targets.;Heterogeneous valuation of the bidder may also affect takeovers. If there is wide disagreement over the value of bidder securities, then it may be difficult to negotiate an acquisition agreement using bidder securities as consideration. Cash should be a more suitable form of payment when bidder heterogeneity is high.;Empirical results are mixed. A positive relationship between dispersion of analysts' forecasts and premiums paid to targets shareholders is found only for firms contesting a takeover. The strongest influence of heterogeneity is found in target selection. Firms with greater dispersion of analysts' forecast are more likely to become targets than firms with lower dispersion. Alternative explanations for the results are considered.