The TL;DR version is that acquisition offers in round numbers signal that the buyer hasn't done proper due diligence. "Round initial offers were less likely to secure a deal than precise offers. When they did, they ended up costing the bidder more. All other things being equal, an acquisition launched with a bid rounded to the $5 level had, on average, an $18 million larger price tag than an acquisition launched with a more precise bid. The stock market reaction was also 2% less (i.e., the bidder’s stock price jumped on average 2% less) for bidders making round offers than for those making precise offers."
definitely interesting topic. Reading their analysis though, led me to believe they didn't control for enough obvious variables.
Let me go through a scenario to give an example: how much was Nokia worth to Microsoft? Their idea that "due diligence" would uncover a value, and MS should signal the due diligence and the value with the pennies in the offer price doesn't reflect the truth of the situation that nobody knew or could know the value.
I'm not talking about a hindsight analysis after the Microsoft's mobile strategy failed; let's say it had succeeded and Microsoft was now equal to Android and iOS in a vicious 3 way competition: how much of that value would you attribute to the parts that came from Nokia? How much of the value would be due to MS's software? whose marketing muscle was it? Since it would now be a threeway competition, profits would be thinner, how much of that could be predicted with "due diligence"?
You don't know, because nobody knows; these types of intangibles are on the balance sheet as Goodwill because it's not possible to put a value on them except immediately post facto an acquisition. Due diligence is to uncover that what they are selling is what you think you buying, not the value you think you can extract from it in combination with your own assets, that's a secret you keep.
You're right; there are many unknowns. But that doesn't mean you pull a number out of thin air. M&A teams use all kinds of models to make financial projections and calculate ranges for valuation. Even for the LinkedIn acquisition, other bidders backed away because per their calculations, the deal was getting too pricey.
The rounding thing I think is only a signal. When you get a rounded offer, you feel that the buyer has room to go up. When you get a precise offer, the signal is the buyer has an exact notion of how much this is worth to them, so they might not be willing to go much higher than their initial offer. It's a psychological thing which will probably have a smaller effect in a bidding war.
The TL;DR version is that acquisition offers in round numbers signal that the buyer hasn't done proper due diligence. "Round initial offers were less likely to secure a deal than precise offers. When they did, they ended up costing the bidder more. All other things being equal, an acquisition launched with a bid rounded to the $5 level had, on average, an $18 million larger price tag than an acquisition launched with a more precise bid. The stock market reaction was also 2% less (i.e., the bidder’s stock price jumped on average 2% less) for bidders making round offers than for those making precise offers."