Cashing Out: The Rise of M&A in Bankruptcy

by Stuart Gilson, Edith Hotchkiss & Matthew Osborn

Overview — One consequence of the 2008 financial crisis was the virtual disappearance of traditional mergers and acquisitions activity. The years following the onset of the financial crisis have demonstrated, however, that M&A deal making is alive and well—in Chapter 11. In this study of a large sample of Chapter 11 cases, the authors examine how and why M&A has become a significant part of the process, arguing that the rise of M&A has blurred the usual distinctions between reorganization and liquidation.

Author Abstract

The use of M&A in bankruptcy has increased dramatically in recent years, leading to concerns that the Chapter 11 process has shifted toward excessive liquidation of viable firms. In this paper, we argue that the rise of M&A has blurred traditional distinctions between "reorganization" and "liquidation." 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, and unsecured creditor recoveries and post-bankruptcy survival rates are not different when bankrupt firms sell businesses as going concerns.