Acquisitions of Distressed Firms: 'A Gem in the Rough or a Pig in a Poke': An Empirical Analysis of the European Market for Mergers and Acquisitions

Daniel Birk & Jonas A.A Lawaetz

Student thesis: Master thesis


This paper examines acquisitions of distressed targets from the acquirers’ point of view on the European market. Even though fire-sales have caught the attention of researches through the last decade the application of the theoretical framework to acquisitions have first gained ground in the recent years. The paper provides evidence for distressed targets are sold at a discount compared to non-distressed targets. The discount is even deeper when the targets industry also faces distress. There were no results indicating that fire-sale, which was a prediction of Shleifer & Vishny (1992), caused the distressed target to be sold to an acquirer outside the industry. However, it was demonstrated that acquirers outside the industry exploited the targets weakened bargaining power and was able to gain higher abnormal returns. The paper was not able to show that the level of implicit competition was a fire-sales channel when the industry also faced distress. The paper also investigated whether the asset specificity was deterministic for a fire-sale to occur as proposed by several theories. The paper was not able to demonstrate asset specificity as a fire-sale channel. It was also investigated whether the access to the equity market and the general conditions on both the debtand equity markets was a channel of fire-sales. The paper was not able to show any robust results to support this. The paper also aimed to investigate how general economic- and financial crisis affected the acquisition outcome of distressed target acquisitions. Empirical evidence of distressed targets sold during a crisis at a larger discount was also documented. At last, the paper examined if turnaround skills obtained through experience and sufficient slack resources had an influence on the acquisitions outcome. There was nothing in the results indicating this. Even though the paper was able to show that fire-sales exists on the European market. All the findings the study could show was on short-term. However, on the long-term the study was not able to find any significant abnormal acquirer gain.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2018
Number of pages252