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Cash, access to credit, and value creation in M&As

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  • José Manuel Campa

    ()
    (IESE Business School)

  • Ignacio Hernando

    ()
    (Banco de España)

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    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.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0915e.pdf
    File Function: First version, July 2009
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0915.

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    Length: 38 pages
    Date of creation: Jul 2009
    Date of revision:
    Handle: RePEc:bde:wpaper:0915

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    Keywords: Mergers and acquisitions; payment method; credit conditions;

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