The Role of Debt Purchases in Takeovers: A Tale of Two Retailers

Abstract

In this paper, we examine two acquisitions of financially distressed retailers: Federated's takeover of Macy's, and Zell Chilmark's takeover of Carter Hawley Hale. In both cases the raider purchased some of the target's outstanding debt to launch its takeover attempt. These debt purchases appear to have been facilitated by two salient factors: the raider's comparative advantage over existing debtholders and the presence of large blockholdings of debt. Our analysis of indicates that, when these factors are present, it is optimal for a raider to initiate a takeover of a distressed firm through purchasing a block of debt. Target bondholder reaction will be favorable while shareholder reaction may be either favorable or unfavorable.

JEL Classification: D82, G33, G34