Bondholder Wealth Effects In Mergers An
THE JOURNAL OF FINANCE • VOL. LIX, NO. 1 • FEBRUARY 2004
Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s
MATTHEW T. BILLETT, TAO-HSIEN DOLLY KING, and DAVID C. MAUER∗
ABSTRACT
We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns.
Additionally, target bonds have significantly larger returns when the target’s rating is below the acquirer’s, when the combination is anticipated to decrease target risk or leverage, and when the target’s maturity is shorter than the acquirer’s. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.
U.S. COMPANIES ANNOUNCED 8,309 mergers and acquisitions (M&A) in 2001. The value of these deals exceeded $700 billion. This actually represents a decline in M&A activity, which saw 10,833 deals worth $1.28 trillion in 2000 and total deals worth $1.4 trillion and $1.2 trillion in 1999 and 1998.1 Given the significance of M&A activity, an important question is: Do mergers create value, and if so, for whom? The existing literature thoroughly documents the wealth effects experienced by target and acquirer stockholders, but there is limited evidence on the wealth effects experienced by bondholders.2 The purpose of this study is to fill this gap by examining the effects of 940 mergers and acquisitions on the value of 3,901 target and acquirer bonds during the period from 1979 to
1997.
The theoretical literature suggests that bondholders should experience significant wealth effects in mergers. Levy and Sarnat (1970), Lewellen (1971), and Higgins and Schall (1975) argue that mergers may increase bondholder wealth through coinsurance. In its simplest form, risky debt benefits
Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s
MATTHEW T. BILLETT, TAO-HSIEN DOLLY KING, and DAVID C. MAUER∗
ABSTRACT
We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns.
Additionally, target bonds have significantly larger returns when the target’s rating is below the acquirer’s, when the combination is anticipated to decrease target risk or leverage, and when the target’s maturity is shorter than the acquirer’s. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.
U.S. COMPANIES ANNOUNCED 8,309 mergers and acquisitions (M&A) in 2001. The value of these deals exceeded $700 billion. This actually represents a decline in M&A activity, which saw 10,833 deals worth $1.28 trillion in 2000 and total deals worth $1.4 trillion and $1.2 trillion in 1999 and 1998.1 Given the significance of M&A activity, an important question is: Do mergers create value, and if so, for whom? The existing literature thoroughly documents the wealth effects experienced by target and acquirer stockholders, but there is limited evidence on the wealth effects experienced by bondholders.2 The purpose of this study is to fill this gap by examining the effects of 940 mergers and acquisitions on the value of 3,901 target and acquirer bonds during the period from 1979 to
1997.
The theoretical literature suggests that bondholders should experience significant wealth effects in mergers. Levy and Sarnat (1970), Lewellen (1971), and Higgins and Schall (1975) argue that mergers may increase bondholder wealth through coinsurance. In its simplest form, risky debt benefits
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