Acquisitions as a Means of Restructuring Firms in Chapter 11

This paper provides empirical evidence that takeovers can facilitate the efficient redeployment of assets of bankrupt firms. We investigate two questions central to the debate over acquisitions of bankrupt companies based on a sample of 55 firms acquired in Chapter 11. First, we examine whether these acquisitions occur in a competitive environment. Although bankrupt targets are on average purchased at a 45% discount relative to prices paid for non-bankrupt targets in the same industry, there are often multiple bidders competing for the target firm. Bidders are generally in related industries and often have some prior relationship to the target, suggesting they are well informed with respect to the value of the target. Second, we consider whether acquisitions in bankruptcy create value be examining ex-post measures of the success of the transaction. We find that on average acquisitions result in improved operating performance in spite of the fact that many acquirers are highly levered and operate in distressed industries. We also find positive and significant abnormal stock returns for the bidder and target firms at the announcement of the acquisition, suggesting the market perceives the acquisition as favorable for both acquirer and target company shareholders