November 5, 2019
M&A Arbitrage: Do Arbs Influence the Consideration Mix?
I’ve previously blogged merger arbitrage and the impact that it can have on the parties’ stock prices after the announcement of a deal. But a new study says that the potential for post-signing shenanigans by arbs can play a significant role in the buyer’s initial decision concerning the type of consideration to use in the transaction. Here’s an excerpt from the abstract:
Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders that face higher short selling potential include a higher proportion of cash in their M&A payments in order to reduce the negative price pressure resulting from merger arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante lending supply of bidder shares on the percentage of cash in M&A payments.
A high supply of bidder shares available for lending means that arbs will have easier access to those shares for borrowing and fewer constraints on their ability to sell short. So, checking out the level of supply could provide helpful insights for sellers about potential buyers’ pain thresholds when it comes to the mix of stock and cash consideration when they’re negotiating a deal.
– John Jenkins