Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s

Abstract

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders for a sample of 940 offers involving 3,901 bonds during the period 1979-1997. We find strong evidence of a coinsurance effect for target bondholders, and we are able to trace target bondholder gains to a wealth-redistribution from target stockholders. During the announcement period, average acquirer excess bond returns are significantly negative while average target excess bond returns are significantly positive. For target bonds, the average excess return to below investment grade bonds is over 4%. Target bondholder returns are significantly larger when the merger reduces asset risk, when the target bond rating is below the acquirer bond rating, when the pre-merger leverage ratio of the target is greater than the pre-merger leverage ratio of the acquirer, and when the average target bond maturity is shorter than the average acquirer bond maturity. In addition, both target and acquirer excess bond returns are significantly smaller if the offer is hostile and are significantly larger in the 1990s, an era marked by increased bondholder event risk protection. Estimation of simultaneous equations models reveals that target stockholder dollar gains are significantly decreasing in target bondholder dollar gains, a result consistent with the view that target bondholder gains in takeovers come at the expense of target stockholders.

Keywords: Mergers, Acquisitions, Takeovers, Corporate Control, Bonds, Wealth Effects

JEL Classification: G32, G34