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When acquirers are short on cash flow in M&A deals

International review of financial analysis, 2024-07, Vol.94 [Peer Reviewed Journal]

Distributed under a Creative Commons Attribution 4.0 International License ;ISSN: 1057-5219 ;EISSN: 1873-8079 ;DOI: 10.1016/j.irfa.2024.103312

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  • Title:
    When acquirers are short on cash flow in M&A deals
  • Author: Ren, Yaru ; Li, Lin ; Tong, Wilson H.S. ; Lam, Peter
  • Subjects: Quantitative Finance
  • Is Part Of: International review of financial analysis, 2024-07, Vol.94
  • Description: Studies on corporate takeovers are voluminous but typically assume that acquirers are not financially constrained. We show that acquirers’ free cash flow (FCF) levels have significant impacts on their takeover activities and consequences. Acquirers with low FCF, despite their high levels of cash holdings, tend to pay in stocks rather than cash. The targets acquired by low-FCF acquirers are of inferior quality relative to those obtained by high-FCF acquirers. After acquisition, low-FCF acquirers seriously underperform their peers, but this underperformance does not exist in high-FCF acquirers. Further, the financial leverage of low-FCF acquirers increases sharply following acquisitions, and a significant number of them become bankrupt or are acquired by other firms. Our evidence suggests the importance of acquirer’s financial position to sustain the normal operation of the combined entity following the deals. Firms with financial constraints, therefore, should be conservative in advancing takeovers.
  • Publisher: Elsevier
  • Language: English
  • Identifier: ISSN: 1057-5219
    EISSN: 1873-8079
    DOI: 10.1016/j.irfa.2024.103312
  • Source: Hyper Article en Ligne (HAL) (Open Access)
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