FSM - Finance & Strategic Management Master Thesis “Bankruptcy acquisitions in Europe: an empirical analysis of a value creating strategy” . Thesis supervisor: Domenico Tripodi Author of the thesis: Raphael Karl Roderich Nitz Date of Submission: May 17th, 2016 Characters: 147.396 Pages: 66 Abstract This thesis provides evidence that takeovers can be a value creating strategy for the acquirer. Depending on the circumstances especially the focus on bankruptcy acquisitions can be of high interest for an acquirer. 14,495 recent takeovers within years of 2008 and 2014 in the euro zone have been examined and the results provide empirical evidence that acquisitions can facilitate a value creating effect for the acquirers. Here, acquirers of bankrupt firms often have some previous relationships along their value chain to the target company which suggests that the acquirers are well informed about the possible value extraction and utilization of the target‘s assets. However, within the examined transactions, findings show that in Europe between 2008 and 2014 non-bankruptcy acquisitions outperformed the bankruptcy transactions. But this performance of bankruptcy acquisitions is time-specific. Firms that are able to acquire bankrupt firms even within a troubled economic cycle must be financially very stable and gain from their strong bargaining power within such an environment. They are able to earn excess returns upon deal announcements of 1.66 percentage points compared to buyers within the post-crisis situation. This evidence is in line with the opinion that some companies can take advantage of fire sales by bankrupt companies as part of a corporate restructuring. In addition, the type of the bankruptcy acquisition is of great importance as its performance is also industry-specific. Based on the fixed assets and their recovery values as well as their obvious synergies potentials bankrupt manufacturing companies seem to be fruitful. Within the examined event window, bankruptcy acquisitions of manufacturing firms received 4.56 percentage points higher cumulative abnormal returns compared to bankruptcy non-manufacturing acquisitions. The market strongly appreciates these types of acquisitions with high abnormal returns. II Table of Contents 1. Introduction ................................................................................................................................ 1 1.1 Research questions ................................................................................................................. 3 1.2 Scope and delimitations .......................................................................................................... 3 2. Research method ........................................................................................................................ 5 2.1 Scientific view ........................................................................................................................ 5 2.2 Research approach .................................................................................................................. 6 2.3 Methodology ........................................................................................................................... 6 2.3.1 The efficient markets framework ..................................................................................... 6 2.3.2 Data criteria and data collection....................................................................................... 7 2.3.3 Event study methodology ................................................................................................ 9 2.3.4 Limitations of the event study methodology ................................................................. 15 2.4 Research plan ........................................................................................................................ 17 3. Mergers & Acquisitions between 2008 - 2014 in Europe ...................................................... 18 3. 1 Definitions ........................................................................................................................... 18 3.1.1 Mergers & Acquisitions ................................................................................................. 18 3.1.2 Bankruptcy ..................................................................................................................... 18 3.2 Mergers & Acquisitions during the financial crisis of 2008 – 2010 .................................... 19 3.2.1 Short outline ................................................................................................................... 19 3.2.2 Merger & Acquisition activity during the crisis ............................................................ 20 3.3 Mergers & Acquisitions during the years 2010-2014 .......................................................... 21 3.3.1 Short outline ................................................................................................................... 21 3.3.2 Merger & Acquisition activity after the crises ............................................................... 21 3.4 Bankruptcy acquisitions 2008 – 2014 .................................................................................. 22 4. Review of literature .................................................................................................................. 24 4.1 Value creation through Mergers & Acquisitions .................................................................. 24 4.2 Mergers & Acquisitions within different market conditions ................................................ 25 4.3 Types of acquirers ................................................................................................................ 26 4.4 Industry specific Mergers & Acquisitions ............................................................................ 26 4.5 Bankruptcy acquisition ......................................................................................................... 27 5. Theoretical rationales for Mergers & Acquisitions............................................................... 31 iii 5.1 Strategic rationales ............................................................................................................... 31 5.1.1 The synergy motive ........................................................................................................ 31 5.1.2 The agency motive ......................................................................................................... 32 5.1.3 The hubris hypothesis .................................................................................................... 33 5.2 Financial rationales ............................................................................................................... 34 5.2.1 Free cash flow hypothesis .............................................................................................. 34 5.2.2 The theory on capital structure and its connection to fixed assets ................................. 35 5.3 Drivers for bankruptcy Mergers & Acquisitions .................................................................. 36 6. Hypotheses ................................................................................................................................ 38 7. Analysis ..................................................................................................................................... 42 7.1 Bankrupt and non-bankrupt acquisitions .............................................................................. 42 7.2 Bankruptcy acquisitions during the crisis vs. post-crisis ...................................................... 46 7.3 Bankruptcy acquisitions of manufacturing and non-manufacturing firms ........................... 50 8. Discussion .................................................................................................................................. 55 8.1. Bankruptcy acquisitions and non-bankruptcy acquisitions ................................................. 55 8.2 Value creation during a crisis through bankruptcy acquisitions ........................................... 57 8.3 Bankrupt manufacturing acquisitions ................................................................................... 59 9. Conclusion ................................................................................................................................. 61 10. Bibliography ........................................................................................................................... 63 11. Appendices .............................................................................................................................. 69 iv List of Figures Figure 1: Event window ................................................................................................................. 10 Figure 2: Research plan .................................................................................................................. 17 Figure 3: European quarterly M&A activity 2004 - 2010 .............................................................. 21 Figure 4: European quarterly M&A activity 2008 - 2014 .............................................................. 22 Figure 5: Bankruptcy acquisitions in Europe ................................................................................. 23 Figure 6: Free cash flow hypothesis ..............................................................................................