Using a sample of mergers and acquisitions (M&As) from 1995 to 2009, we find that the proportion of cash payment increases with hedge fund holdings in the target firms measured before the deal announcement. This effect is more pronounced when the holdings are concentrated in a smaller number of funds. Targets with higher hedge fund holdings are more likely to accept payment in bidders' overvalued equity, especially if the holdings by high-turnover hedge funds is high. When a bidder offers more cash than expected in the presence of hedge funds holding the target, deal completion probability increases, duration shortens, but neither premium nor target announcement returns are affected. Our results suggest that hedge fund short-termism leads to inefficient merger payments for long-term target shareholders.