The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained

57 Pages Posted: 18 Feb 2013 Last revised: 29 Dec 2016

Alexander S. Gorbenko

University of Southern California - Marshall School of Business

Andrey Malenko

MIT Sloan School of Management

Date Written: December 28, 2016

Abstract

While acquisitions are a popular form of investment, the link between firms' financial constraints and acquisition policies is not well-understood. We propose a model that connects bidders' financial constraints to their incentives to initiate deals, bids, and payment method. Because of ability to pay in stock, financial constraints do not affect bidders' maximum willingness to pay, unless they also affect synergies. However, both own and rivals' constraints discourage a bidder from approaching the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash in the payment is positively related to synergies, acquirer's gains from the deal, and negatively to financial constraints.

Keywords: Auctions, financial constraints, mergers and acquisitions, real options, security design

JEL Classification: D44, G32, G34

Suggested Citation

Gorbenko, Alexander S. and Malenko, Andrey, The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained (December 28, 2016). Available at SSRN: https://ssrn.com/abstract=2220006 or http://dx.doi.org/10.2139/ssrn.2220006

Alexander S. Gorbenko

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Andrey Malenko (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
E62-619
Cambridge, MA 02142
United States
617-225-9301 (Phone)

HOME PAGE: http://www.mit.edu/~amalenko

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