M&A Activity and the Capital Structure of Target Firms (original) (raw)
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DISCUSSION PAPER SERIES M&A ACTIVITY AND THE CAPITAL STRUCTURE OF TARGET FIRMS
Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly -within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms' pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to over-leveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
M&A Activity and the Capital Structure of Target Firms
SSRN Electronic Journal
Using a large sample of European acquisitions, we study the impact of M&As on the capital structure of target firms. We find that deviations from a firm's optimal capital structure increase the probability that the firm will be acquired. This effect is asymmetricoverleveraged firms are much more likely to be acquired than underleveraged firms. We also find that target firms rebalance their capital structure significantly following the acquisition, by reducing the deviation from the optimal level. Overall, our results provide support for the trade-off theory of capital structure and underscore the importance of financial synergies arising from M&As.
Target Capital Structure and Acquisition Choices: Evidence from the Greek Market
The main objective of this paper is to analyze whether deviations from the target capital structure affect firms' decisions to become acquirers. The analysis is conducted in two stages. In the first stage we estimate the target leverage ratio considering the main determinants of capital structure. In the second stage we examine whether the deviation from the predicted target debt ratio affects acquisition choices. Our data come from 112 Greek companies listed on the Athens Exchange during 1997-2002. Our empirical results justify our hypothesis that the leverage deficit is negatively related to the probability of a firm becoming an acquirer. Thus, underleveraged firms, according to their target capital structure, are more likely to become acquirers than overleveraged firms. We also test whether size and profitability affect acquisition choices and we find that larger firms are more likely to become acquirers, whereas profitability does not seem to play an important role. Results and conclusions are consistent with similar studies conducted for other economies. JEL Classifications: G3, G32.
Mergers and acquisitions and corporate financial leverage - an empirical analysis of UK firms
2013
This thesis examines the link between mergers and acquisitions (MA and (2) the changes in financial leverage prior to firms' decision to initiate M&As. The empirical evidence on the proposed hypotheses is based on a large sample of firms in the UK during the period 1996 and 2006. The empirical analysis presented in this study contributes to the large and growing body of literature on the interdependence of corporate financing and investment decisions. Specifically, this study contributes to the literature in two ways. First, the thesis investigates the link between firms leverage deviations (i.e. the deviations of firms observed leverage ratios from target leverage ratios) and the probability of undertaking MA for domestic acquisitions (i.e. deals in which the acquirer and the target firm are domiciled in the same country); and for focused (i.e. single-segment) firms undertaking acquisitions. Thus, the leverage deviation effect is not symmetric for all types of acquisitions and ...
Research Paper, 2021
Modern corporates operate in an altogether different landscape characterized by intense competition, where firms find it difficult to survive. Whether they aim for survival or growth, they mostly resort to M&As. The purpose of this paper is to find the justification of a merger's impact on the capital structure of acquiring firms by revisiting the theory and analysis of the data. Methodology: Capital Structure ratios such as Debt/Equity and Debt/Asset of acquiring firms in the year of acquisition and a year after the acquisition have been compared to find out post-acquisition impact. Further profitability ratios such as Return on Capital Employed, Return on Asset, and Return on Net Worth have been compared between a year of acquisition and a year after acquisition to determine stock market response. K-S and S-W test show data is nonnormally distributed for30 acquirers. Statistical tools used to perform data analysis areWilcoxon Signed Rank Test, Mann Whitney U-test, Two-SampleK-S Test, and Sign Test. Findings and conclusions: At 95 % confidence level, test statistics failed to reject Null Hypothesis for all ratios. Therefore, this study did not find any evidence to justify the theory of target capital structure. Also, increasing leverage in capital structure in the post-acquisition period did not help firms improve valuation. Research Limitations: Unavailability of financial data mainly for the unlisted firm and small sample size would have limited the scope of justification of theory in general.
Effect of Mergers on Capital Structure of a Firm
Mergers in Kenya banking industry have grown dramatically since 1994. Some of the reasons put forward for mergers are to meet the increased levels of share capital, market share, firm size, information asymmetry, tax regimes, and to benefit from best global practices among others. The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers. This study sought to establish the effect of mergers on capital structure, using the case of NIC Bank Ltd. The specific objective was to establish the relationship between the bank's capital structure and its bad loans, size, services and interbank. The study adopted an explanatory research design since it is a cause-effect relationship. It used secondary data from the Nairobi Stock Exchange (NSE). Both descriptive and inferential statistics were used to analyze the data. Regression analysis showed that firm size affected capital structure most (β 2 =0.940, p value = 0.002), followed by bad loans (β 1= 0.894, p value = 0.004) and bank services (β 3= 0.641, p value =0.000). Interbank affected capital structure negatively (β 4=-0.511, p value=0.003). The study concludes that mergers increased positively the effect of firm size, services and bad loans on the capital structure while interbank affected capital structure negatively. The study recommends firms in the banking industry to plan and evaluate mergers while focusing on effects of firm size, bad loan, income from services and net interbank on its capital structure. 1.1 introduction Mergers have widely used the technique to increase the rate of growth, size and market share of a firm. Some scholars claim the merger decision is related to capital structure, where the post-merger leverage can increase tax benefits and therefore the firm's value, Lewellen (1971). The relationship between capital structure and merger decisions is still not well understood. There are a few recent articles, for instance, Morellec and Zhdanov (2008) Margrabe (1978) who presented an early example of modeling mergers as an exchange option with exogenous timing, dynamic model of takeovers with two bidders, endogenous leverage, and bankruptcy. Their model supports the empirical evidence that the bidders winning the contest have to leverage below the industry average. Leland (2007) derives a model where only financial synergies motivate the merger decision. He claims that the magnitude of this effect depends on the firm's characteristics like default costs, firm size, taxes, and riskiness of cash flows. Hege and Hennessy (2010) present an analysis where the level of debt plays a strategic role in benefiting from larger merger share. However, there exists a trade-off between higher surplus and the resulting debt overhang which precludes efficient mergers. Morellec and Zhdanov (2008) predict that leverage is reduced before the merger and increased afterwards as a result of an option exercise game between bidding and target shareholders and Harford et al. (2009) find that firms adjust their capital structures before mergers if they are overleveraged. The assumption that a firm cannot acquire a firm that is larger than it implies that a firm can reduce its chance of being acquired by acquiring another firm. This increases its size, which then reduces the number of other firms that are potential acquirers. There are fewer firms that are sufficiently large. In fact, empirically it has been found that the probability of being a target in an acquisition is decreasing in a firm's size (Hasbrouck (1985), Palepu (1986), Ambrose and Megginson (1992). In the first scenario only profitable acquisitions occur (the ―efficient‖ scenario). In the other scenario (the ―eat-or-be-eaten‖ scenario) defensive, unprofitable acquisitions that preempt some profitable acquisitions occur. Which scenario arises depends on the incentives of
How Do Firms Price Optimal Capital Structure? Evidence from Mergers and Acquisitions
2017
This study examines how capital structure considerations affect acquisition pricing. Overlevered bidders pay higher premiums in leverage rebalancing deals and create leverage slack, while under-levered acquirers are not equally incentivized to lever up towards target leverage; rather they offer higher premiums using overvalued equity as they consider the market timing opportunity more valuable than leverage rebalancing. This asymmetry is more pronounced for financially constrained firms with non-rated debt. Over-levered acquirers also pay higher premiums for potential debt capacity improvement. Rebalancing and debt capacity improvement are value-enhancing for overlevered acquirers only when the option to borrow is exercised in the long-run. JEL Classification: G34
Accounting & Finance, 2012
This paper examines leverage in European private equity led LBOs. We use a unique, selfconstructed sample of 126 European private equity sponsored buyouts completed between June 2000 and June 2007. We find that leverage determinants derived from classical capital structure theories do not explain leverage in LBOs, while these determinants do drive leverage in a control group of comparable public firms. Rather, we document that leverage levels in LBOs are related to the prevailing conditions in the debt market. In addition, our results support the hypothesis that the reputation of the private equity sponsor involved in the buyout is positively related to LBO leverage. Finally, also the type of buyout (primary versus secondary) is related to the amount of leverage used.
Market Misreaction? Leverage and Mergers and Acquisitions
Journal of Risk and Financial Management, 2022
Using a large database of U.S. mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, making comparisons with non-banks. We compare announcement period reactions (computed in different ways) for lower (lower than sample median) capitalized banks and non-banks with that for higher capitalized banks and non-banks. We confirm our results using multivariate analyses—after controlling for year and industry fixed effects—and we check the associations of capital ratio with announcement period abnormal returns, longer-term performance, as well as certain bank-specific and non-bank specific performance measures. For banks, we find that a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement period abnormal returns. However, for these banks, ...
Leverage and corporate performance: Evidence from unsuccessful takeovers
The Journal of Finance, 1999
This paper finds that, on average, targets that terminate takeover offers significantly increase their leverage ratios. Targets that increase their leverage ratios the most reduce capital expenditures, sell assets, reduce employment, increase focus, and realize cash f lows and share prices that outperform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverageincreasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but because it commits managers to making the improvements that would be made by potential raiders.