Cashing Out: The Rise of M&A in Bankruptcy

Abstract

The use of M&A in bankruptcy has increased dramatically, leading to concerns that Chapter 11 leads to excessive liquidation of viable firms. 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 for firms with more secured debt, and that recoveries and post-bankruptcy survival rates are not different when bankrupt firms sell businesses as going concerns versus reorganizing independently. Our results are consistent with the efficient redeployment of assets via sales in bankruptcy.