The performance of acquisitions by high default risk bidders

Abstract

We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run under performance of acquiring firms is largely driven by this sub-set of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.