Premiums, announcement returns and desperation in high tech mergers: A growth options analysis

We examine the announcements of high tech mergers using a relatively new proxy for growth options we call “growth to book.” We find this adds significantly to help explain the premiums paid and announcement period abnormal returns when acquiring tech targets. Higher synergies are expected by managers and investors when targets have low growth options and acquirers have high growth options, resulting in higher premiums paid and either less negative or more positive abnormal returns. However, we find significant variation in the results by the relative size of the target and when low growth to book (GTB) firms acquire. While high GTB acquirers tend to pay more in premiums, low GTB acquirers can pay higher premiums and receive some of the most negative returns at announcement. We find evidence some acquisitions are motivated by desperation as these acquirers have the lowest GTB and do a disproportionate number of the relatively largest deals, receiving the worst abnormal returns at announcement.