The Psy-Fi Blog, which looks at the psychology of the stock market, has an excellent post on mergers and acquisitions – specifically addressing why investors should be wary of a wave of activity.

This part really jumped out: Why does M&A activity pick up when stocks are near their 52-week highs rather than, say, when the stocks are cheaper and takeover targets can be had at a lower price?

The answer, according to the blogger’s research, is that shareholders are less willing to accept a takeover offer that is below the stock’s 52-week high because they feel the stock is worth more. At the same time, the acquirer’s management have a tough time justifying paying a huge premium, so the closer the targeted stock is to a 52-week high, the easier it is to justify paying, um, too much.

The blogger explains: “Selling shareholders want a premium over the 52 week high, acquiring shareholders don’t want to pay much of an excess over the current share price: the net result is that if shares are trading near the 52 week high it’s easier to justify the valuation to both groups.

“This, of course, is just madness: the closer a company is currently trading to its most recent peak the more likely it is to be successfully targeted by a predator. No wonder value investors tend to run away from corporations that engage in major takeover activities.”