Searching for greener pastures: effect of past performance and target differences on M&A premium

Abstract

Purpose - The purpose of this paper is to provide an understanding of how backward intelligence and forward-looking intelligence interact and impact decision making in the context of acquisitions. Past experiences provide essential information used for decision making, however, the ex ante nature of premiums, which require forward-looking intelligence, can change how experience is utilized.Design/methodology/approach - The authors utilize a fixed effects model to examine acquisitions conducted by US public firms during the period of 1993-2015.Findings - The authors find that as past acquisition returns increase, acquirers are likely to adopt a backward-looking perspective of past performance that leads to higher premiums, as opposed to a forward looking perspective of consequences. The relationship between past performance and premium is moderated by differences in the target's industry and the target's slack levels relative to the acquirer. The study findings suggest that forward-looking intelligence can alter attention and ultimately behavior based on backward looking intelligence. By focusing on how these two contrasting perspectives interact, our findings extend research on the tension between backward-looking and forward-looking logics of decision making.Originality/value- Unlike extant literature of acquisition premiums that have mainly focused on the valence and magnitude of experience, the authors focus on how backward-looking decision behavior changes when the firm's expectations of the future are incorporated. The authors empirically demonstrate how a lower acquisition premium is achieved when the decision of how much to pay is an interaction of the past and the future.