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

Yaru Ren (1) , Lin Li (2, 3) , Wilson H.S. Tong (4) , Peter Lam (5)

1 Shenzhen Univerisity [Shenzhen]
2 Audencia Business School
3 Shenzhen Audencia Business School, Shenzhen University
4 POLYU - The Hong Kong Polytechnic University [Hong Kong]
5 UTS - University of Technology Sydney

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.

Mots clés: Corporate takeover Free cash flow Agency problem Financial constraints JEL: G33 G34; Corporate takeover; Free cash flow; Agency problem; Financial constraints JEL: G33; G34

Domaines: Économie et finance quantitative [q-fin]; Économie et finance quantitative [q-fin]

Yaru Ren, Lin Li, Wilson H.S. Tong, Peter Lam. When acquirers are short on cash flow in M&A deals. International Review of Financial Analysis, 2024, 94, pp.103312. ⟨10.1016/j.irfa.2024.103312⟩. ⟨hal-04562214⟩