The performance of acquisitions by high default risk bidders

Abstract

We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run underperformance of acquiring firms is largely driven by this subset of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.

Earnouts: The real value of disagreement in mergers and acquisitions

“…From a more general perspective, default risk has been proven to play a key role in M&As. Acquisitions tend to increase the risk of default of the bidder (Bruyland et al, 2019;Furfine & Rosen, 2011), whose abnormal returns are influenced by its leverage (Murray et al, 2017). Our paper verifies that the return obtained by the seller, or its premium, can also be influenced by the default risk of the bidder: In M&As that include earnouts, the more the bidder is exposed to default risk, the lower the value of the consideration received by the sellers.…”

“…These authors went on to verify that this increase in leverage is positively related to the bidder's abnormal equity returns, which they see as compensation for the heightened risk borne by stockholders. Bruyland et al (2019) investigated the takeover strategies of bidders characterized by a high risk of default, determining that they tend to acquire larger unrelated targets which are frequently unprofitable; this implies that they seem to worsen their financial condition. Contrary to this evidence, Koerniadi et al (2015) pointed out that, if we limit the focus to cross-border deals, acquisitions tend to reduce the bidder's default risk.…”

Macroeconomic factors, working capital management, and firm performance—A static and dynamic panel analysis

“…It is also speculated that many companies have low-interest coverage ratios when interest rates are cheap, and they work to make a high profit. Besides, lower interest rates would start a more robust output (Bruyland et al, 2019). This study examines the moderating role of market variables in the relationship between working capital management (WCM) and companies' profitability listed on the TSE from 2008 to 2017.…”

A kereskedelmi szektor felvásárlásainak hatása a csődkockázat mértékére és a hatékonyságra

“…Az eredmények szerint ezek a vállalkozások nagyobb cégmérettel rendelkező, kevésbé jövedelmező, más ágazatban működő céltársaságokat választanak ki, és recesszió alatt folytatnak tranzakciókat. Bruyland et al (2019) újabb kutatása hasonló eredményeket hozott: A magas csődkockázattal rendelkező felvásárló társaságok tranzakciót követő ROA értéke kedvezőtlenebb volt a referencia csoporthoz képest. Furfine & Rosen (2011) 1194 egyesülés vizsgálata alapján is azt állapította meg, hogy a fúzió növeli a csődkockázatot.…”