Delving into the acquisitive nature of distressed firms

Abstract: After observing cases of financially distressed firms engaging in diversifying acquisitions, the motivation for this thesis was found. The purpose of this thesis is to investigate the role played by diversification through cross-border and/or cross-industry acquisition in change in financial distress of the acquirer. This research is implemented through a quantitative approach utilizing univariate tests followed by a cross-section OLS regression to further test the significance, both statistically and economically. The results are then analyzed and discussed in the light of existing theories. This paper is intensively built upon prior research and literature on bankruptcy risk, acquisition deals and determinants of M&As. This paper also accounts for the general motivations and factors behind M&A. However, the focus of the paper remains on the distressed acquirers in order to test their rationale and expectations to involve in mergers and acquisitions in difficult times. This thesis uses a sample of 373 acquisition transactions from the countries of the continental Europe during the period between 2009 and 2019 to empirically test the effectiveness of diversifying acquisitions on the improvement of the financial positions of the acquirers. The empirical analysis reported in this paper displays that diversification acquisitions lead to a positive effect on the financial position of the acquirer. In other words, it implies that distressed acquirers are benefitted from the diversifying acquisitions, leading them to a better financial position. The reported results are robust to different measures of financial distress. However, the economic significance of the improvement is open to debate.