Wealth Transfers Among And Between Bond

Wealth Transfers among and between Bond Issues in Mergers and
Acquisitions: Evidence from Bond Tender Offers

Matthew T. Billett* and Ke Yang **

March 2011

Abstract: We explore the wealth effects of mergers and acquisitions to bondholders at the bond issue level using a sample of mergers and acquisitions that involve a tender offer for one or more of the target or acquiring firms’ bond issues. Over the period 2000-2008 such tender offers occur in 32% of the mergers and acquisitions involving targets and acquirers with outstanding rated bonds. We find these tender offers influence not only the associated bond’s wealth, but also the wealth of shareholders and sibling and other bond issues that remain outstanding.

We thank Paul Hribar, Erik Lie, Jay Sa-Aadu, Anand M. Vijh, seminar participants at Lehigh
University, the University of Iowa, the University of Texas at El Paso, and the University of
Wyoming for helpful comments. All errors are our own.

*

Tippie College of Business, University of Iowa. Email: [e-mail]
College of Business and Economics, Lehigh University. Email: [e-mail].

**

1

Mergers and acquisitions (M&A) are one of the most value relevant actions a firm can undertake. Numerous studies document that the wealth effect to a particular class of securities depends on the overall synergistic gain, the relative bargaining power of the target and acquirer, and on wealth transfers between shareholders and debtholders. Bradley, Desai and Kim (1988) report that merger announcements result in a 7.43% increase in the combined value of target and acquirer shares. However these gains are far from evenly split. Target shareholder wealth increases by 31.77% while acquirer shareholders gain little or even lose value depending on the time period examined. Prior studies document mixed evidence on the wealth effects for target and acquirer bondholders. Kim and McConnell (1997), Asquith and Kim (1982), Dennis and
McConnell (1986) and

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