Cash, Access to Credit, and Value Creation in M&As

Abstract

The worldwide availability of easy external financing has been an essential driver of recent M&A activity and a growing perception exists that such conditions may have resulted in a large number of non-value increasing transactions. This paper evaluates the interaction between credit conditions, the method of payment and value creation in a sample of European M&A transactions. The contribution of the paper is twofold. First, we analyze to what extent more generous financing conditions lead to deals that were less-likely to be value creating. Second, we estimate a joint model on the likelihood of choosing cash as a method of payment and the amount of value-created by such deals, controlling for the impact of financial conditions. We find that lower corporate bond spreads are correlated with less value creation in M&A deals suggesting that easy financial conditions may have resulted in M&A deals less-likely to generate value. We also find that higher leverage and a better cash-flow position of the target are more likely to result in cash deals and these deals provide higher excess returns to targets although do not generate value for the deal.

Keywords: Mergers and acquisitions, payment method, credit conditions

JEL Classification: G14, G32, G34