The target prices made by brokerage analysts can be used as a reference point for judging the likelihood of a merger being completed. Mergers are more likely to be completed when the acquisition price is above analysts’ target prices. The probability of the deal being completed drops when there is a higher level of dispersion among analysts’ target prices.

The conclusions are based on an analysis of merger offers made between March 1999 and December 2014. The research sample covered 1,311 deals. Approximately 85% of the proposed mergers were ultimately completed.

In general, the larger the premium offered to acquire the company (the bid premium), the more likely the merger was to be completed. For every 10% the bid exceeded the stock’s price 20 trading days prior to the merger announcement, the odds of the merger being completed increased by 1%. (A 20-day window was used to account for the possibility of the stock price running up in the days ahead of the actual merger announcement.) To the extent that the bid premium exceeded analysts’ target prices (the relative bid premium), the likelihood of the merger being completed increased even more. Offers in which the bid premium exceeded the return projected by analysts were associated with a 7.5% higher merger completion rate.

The opposite pattern occurs when analysts’ target prices differ. For every 10% divergence in analysts’ target prices, merger completion rates fell by 2.4%. Notably, while larger premiums over the analysts’ target prices were associated with higher completion rates, the opposite was true with lower premiums.

Commenting on their analysis, the study’s authors describe analysts’ target prices as benchmarks. Investors compare the acquisition price for the company against the return analysts project for the stock. If the premium is not large enough, investors may choose to oppose the merger. The authors acknowledge the need for further research into this matter to determine the importance of target prices as benchmarks for comparing merger prices during a takeover process, however.

Source: “Security Analyst Target Prices as Reference Point and Takeover Completion,” Dirk Gerritsen and Utz Weitzel, Journal of Behavioral and Experimental Finance accepted manuscript.