Mergers Hurt Credit Rating

Standard & Poor's recently analyzed 101 mergers and acquisitions worth more than $5 billion since 2000 and found that these mergers and acquisitions can hurt credit ratings. In fact, 53 of the 101 transactions resulted in a credit rating that dropped at least one notch. Twenty one of the transactions resulted in no credit change and 27 resulted in a higher credit rating. The risks cited by S&P in the downgrades include weaker pro forma credit measures, reduced free cash flows, and increased business risk for the combined firm. It appears that many acquirers are borrowing too much in paying for acquisitions, at least according to S&P.