Studies of mergers and acquisitions have struggled to identify characteristics of M&A transactions that are consistently associated with positive returns for buyers. The authors report the findings of their study of buyers’ gain in fire sales by examining the stock price reaction to corporate announcements of acquisitions of distressed companies or their assets. During the period from 1982 to 2012, buyer returns were approximately two percentage points higher in fire sales than in regular M&A transactions.
The explanation of this result is shown to be the reduction in the sellers’ bargaining power. Consistent with that explanation, the authors found no difference in either the operating profitability of the buyers after acquisitions, or in the combined announcement returns of buyers and sellers between fire sales and regular acquisitions, suggesting that the quality of the match is similar in both types of transactions.
For corporate practitioners, one implication of these findings is that corporate acquirers—and not just the private equity firms that focus on distressed companies—should consider the purchase of distressed assets as a value-adding way of deploying capital. From a public policy perspective, the spillover costs associated with fire sales for the distressed seller’s suppliers and customers are roughly comparable to those in regular M&A deals. Moreover, fire sales do not depress the asset values of other companies in the seller’s industry. In sum, the welfare losses associated with fire sales are smaller than previously thought, which in turn casts doubt on the $1.8 trillion of federal bailout funds appropriated in response to the COVID-19 pandemic as the best use of taxpayer money.