Cashing Out: The Rise of M&A in Bankruptcy

59 Pages Posted: 10 Jan 2015 Last revised: 16 Mar 2016

See all articles by Stuart C. Gilson

Stuart C. Gilson

Harvard Business School - Finance Unit

Edith S. Hotchkiss

Boston College - Carroll School of Management

Matthew G Osborn

Cornerstone Research

Date Written: March 6, 2016

Abstract

The use of M&A in bankruptcy has increased dramatically, leading to concerns that Chapter 11 leads to excessive liquidation of viable firms. We examine the drivers of M&A activity, based on factors specific to Chapter 11 as well as more general factors that drive M&A waves for non-distressed firms. M&A in bankruptcy is counter-cyclical, and is more likely when the costs of financing a reorganization are greater than financing costs to a potential acquirer. Consistent with a senior creditor liquidation bias, the greater use of secured debt leads to more sales in bankruptcy, but this result holds only for sales that preserve going concern value. We also show that overall creditor recovery rates are higher for firms with more secured debt, and that recoveries and post-bankruptcy survival rates are not different when bankrupt firms sell businesses as going concerns versus reorganizing independently. Our results are consistent with the efficient redeployment of assets via sales in bankruptcy.

Keywords: Chapter 11, Bankruptcy, Mergers and Acquisitions, Section 363, Asset Sales, Liquidations, Creditor Control

JEL Classification: G33, G34

Suggested Citation

Gilson, Stuart C. and Hotchkiss, Edith S. and Osborn, Matthew G, Cashing Out: The Rise of M&A in Bankruptcy (March 6, 2016). Available at SSRN: https://ssrn.com/abstract=2547168 or http://dx.doi.org/10.2139/ssrn.2547168

Stuart C. Gilson

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
(617) 495-6243 (Phone)
(617) 496-8443 (Fax)

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Matthew G Osborn

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States
202-912-8905 (Phone)

HOME PAGE: http://https://www.cornerstone.com/

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