Acquirer Financial Constraints, Takeover Characteristics, and Short‐term Performance of Distressed Target Takeovers University of Amsterdam, Amsterdam Business School Master Thesis June 2015 Student: F. L. Gelens Student number: 10034714 Email: [email protected] Supervisor: dr. V. Vladimirov Faculty: Economics and Business Program: Business Economics, Finance Track Field: Corporate Finance, Mergers & Acquisitions Statement of Originality: This document is written by Student F. L. Gelens who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. Abstract Many motives for corporate acquisitions have been investigated, however the takeovers of financially distressed targets are less well explored. The papers that investigate distressed target takeovers examine the takeover characteristics and their wealth effects for the target and acquirer shareholders. These papers however, do not investigate the possible influence of acquirer financial constraints on these factors. This study examines whether acquirer financial constraints are related to the premiums, payment method, and short‐term performance of distressed target takeovers. Despite inconsistent findings across the different financial distress measurements used, the results suggest that acquirers of financially distressed targets are more likely to pay with equity, and this likelihood is increased when the acquirer is financially constrained. Additionally, the results of this research suggest that mergers and acquisitions in which distressed targets are combined with a financially unconstrained acquirer, lead to the highest wealth effects for the target company. Table of Contents 1. Introduction ................................................................................................................................................................................ 4 2. Literature Review ..................................................................................................................................................................... 7 2.1 Motives for distressed target takeovers...................................................................................................................................................................... 7 2.2 Fire sales .................................................................................................................................................................................................................................... 8 2.3 Distressed target takeovers .............................................................................................................................................................................................. 9 2.4 Method of payment ............................................................................................................................................................................................................ 12 2.5 Determinants of short‐term performance in M&A ............................................................................................................................................. 13 2.5.1 Determinants of short‐term wealth effects for acquiring companies........................................................................................... 14 2.5.2 Determinants of short‐term wealth effects for target companies .................................................................................................. 14 2.6 Acquirer financial constraints ...................................................................................................................................................................................... 15 2.7 Hypothesis ............................................................................................................................................................................................................................. 16 3. Research Design ..................................................................................................................................................................... 18 3.1 Data and sample selection .............................................................................................................................................................................................. 18 3.1.1 Data .............................................................................................................................................................................................................................. 18 3.1.2 Sample selection .................................................................................................................................................................................................... 18 3.2 Methodology ......................................................................................................................................................................................................................... 19 3.2.1 Financial constraints and Financial distress ............................................................................................................................................ 19 3.2.2 Financial distress and the takeover premium ......................................................................................................................................... 20 3.2.3 Financial distress and the method of payment ....................................................................................................................................... 22 3.2.4 Short‐term M&A performance and its relationship to financial distress and takeover characteristics ....................... 24 4. Results ....................................................................................................................................................................................... 28 4.1 Descriptive statistics ......................................................................................................................................................................................................... 28 4.2 Regression results .............................................................................................................................................................................................................. 31 4.2.1 Premium Regression ........................................................................................................................................................................................... 31 4.2.2 Method of payment Tobit regressions ........................................................................................................................................................ 32 4.2.3 CAR Regressions .................................................................................................................................................................................................... 34 4.3 CAAR t‐tests........................................................................................................................................................................................................................... 35 4.3.1 Full cash versus Full stock CAARs ................................................................................................................................................................. 35 4.3.2 CAARs differences by acquirer constraints and target distress ...................................................................................................... 36 4.4 Robustness Checks ............................................................................................................................................................................................................. 37 4.4.1 Premium robustness check .............................................................................................................................................................................. 37 4.4.2 Method of payment robustness check ......................................................................................................................................................... 37 4.4.3 CAAR differences robustness check. ............................................................................................................................................................ 38 5. Discussion ................................................................................................................................................................................. 40 6. Conclusion ................................................................................................................................................................................ 45 References .......................................................................................................................................................................................... 46 Appendix ............................................................................................................................................................................................