Comparison between target and acquirer leverage and their relation at the time of the merger: evidence from U.S. data during 1984 and 2014

Abstract

In this thesis, I compare target and acquirer leverage and study the relation between target and acquirer leverage at the time of the merger. By constructing a large over time sample with various explaining variables, my objective is to recognize factors affecting target leverage. Factors of interest are referred as qualitative variables and they are takeover year, industry, takeover type, and size. Theoretical framework for this thesis is based on trade-off theory. Trade-off theory and leverage associated with mergers has been of interest to many researchers over years. Existing studies have focused on premerger and postmerger leverage and their special interest is on acquirer leverage. Leverage at the time of the merger is relatively unstudied topic. Overall, the aim of this thesis is to study whether targets have more leverage than acquirers at the time of the merger, the relation between target and acquirer leverage, whether it is positive or negative, and determinants to explain target leverage at the time of the merger.

The sample of this thesis consists of 10,825 transactions in U.S. during 1984 and 2014. The data is derived from SDC U.S. Mergers and Acquisitions database. Year 1984 is selected as the starting year, since the data tends to be consistent only since 1984. The sample is limited to public U.S. targets and acquirers. Hypotheses are constructed based on prior financial research and they are formulated individually on each research topic.

Key findings of this thesis provide a new study angle to financial literature associated with mergers and the findings are mostly contrary to existing literature. Targets tend to be, on average, as leveraged as acquirers at the time of the merger. Quite exactly half of the transactions represent targets with higher leverage and other half represents targets with lower leverage than acquirers. Target and acquirer leverage ratios are positively related but the relation is not perfect. Industry and takeover type tend to be statistically significant variables on explaining target leverage, whereas takeover year and size tend to statistically insignificant variables. Additionally, the results indicate that acquirers bid for targets significantly smaller in size, measured by total amount of assets.