How the Lender–Borrower Relationship Influences M&As: an Analysis of a Strategic Action in Japan

Purpose - This study examines lenders’ reactions to M&A, based on the strength of the lender–borrower relationship and the lender’s expectations of the potential benefits or risks of the deal. Research design, data, and methodology – This research addresses the lender’s influence on the implementation stage of a large-scale strategic action such as M&A to understand the motivation and dynamics of lenders’ responses and empirically examines how the lender–borrower relationship influences the focal firm’s merger and acquisition (M&A) transactions, using data on 501 M&A deals in Japan from 1990 to 2010. Results - The presented analysis found that lenders that have a strong lender–borrower relationship, especially those showing a high debt equity ratio, support borrowers’ M&A progress and the target firm’s lenders resist the deal progressing and may raise the acquisition premium if their current power relative to borrowers is weak. Conclusions - Stakeholders including lenders do not favor strategies of focal firms that threaten their future benefits, while they also tend to estimate the potential benefits and losses by comparing their current circumstances with those of other stakeholders. The empirical results of the presented analysis help explain the mechanism of lenders’ reactions and offer insights into the power of a closer and stronger lender–borrower relationship.