Empirical research on mergers and acquisitions has revealed a great deal about their trends and characteristics over the last century. For example, a profusion of event studies has demonstrated that mergers seem to create shareholder value, with most of the gains accruing to the target company. This paper will provide further evidence on these questions, updating our database of facts for the 1990s.But on the issue of why mergers occur, research success has been more limited. Economic theory has provided many possible reasons for why mergers might occur: efficiency-related reasons that often involve economies of scale or other "synergies"; attempts to create market power, perhaps by forming monopolies or oligopolies; market discipline, as in the case of the removal of incompetent target management; self-serving attempts by acquirer management to "over-expand" and other agency costs; and to take advantage of opportunities for diversification, like by exploiting internal capital markets and managing risk for undiversified managers.Most of these theories have been found to explain some of the mergers over the last century, and thus are clearly relevant to a comprehensive understanding of what drives acquisitions. In addition, some of these reasons for mergers appear to be more relevant in certain time periods. For example, antitrust laws and active enforcement have made merger for market power difficult to achieve since the 1940s. The heyday of diversification mergers was in the 1960s, and there is evidence to suggest many of those mergers were ultimately failures. Mergers as instruments

This paper studies thirty-one highly leveraged transactions~HLTs! that become financially, not economically, distressed. The net effect of the HLT and financial distress~from pretransaction to distress resolution, market-or industry-adjusted! is to increase value slightly. This finding strongly suggests that, overall, the HLTs of the late 1980s created value. We present quantitative and qualitative estimates of the~direct and indirect! costs of financial distress and their determinants. We estimate financial distress costs to be 10 to 20 percent of firm value. For a subset of firms that do not experience an adverse economic shock, financial distress costs are negligible.

mpirical research on mergers and acquisitions has revealed a great deal about their trends and characteristics over the last century. For example, a profusion of event studies has demonstrated that mergers seem to create shareholder value, with most of the gains accruing to the target company. This paper will provide further evidence on these questions, updating our database of facts for the 1990s.But on the issue of why mergers occur, research success has been more limited. Economic theory has provided many possible reasons for why mergers might occur: efficiency-related reasons that often involve economies of scale or other "synergies"; attempts to create market power, perhaps by forming monopolies or oligopolies; market discipline, as in the case of the removal of incompetent target management; self-serving attempts by acquirer management to "over-expand" and other agency costs; and to take advantage of opportunities for diversification, like by exploiting internal capital markets and managing risk for undiversified managers.Most of these theories have been found to explain some of the mergers over the last century, and thus are clearly relevant to a comprehensive understanding of what drives acquisitions. In addition, some of these reasons for mergers appear to be more relevant in certain time periods. For example, antitrust laws and active enforcement have made merger for market power difficult to achieve since the 1940s. The heyday of diversification mergers was in the 1960s, and there is evidence to suggest many of those mergers were ultimately failures. Mergers as instruments

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This paper studies thirty-one highly leveraged transactions~HLTs! that become financially, not economically, distressed. The net effect of the HLT and financial distress~from pretransaction to distress resolution, market-or industry-adjusted! is to increase value slightly. This finding strongly suggests that, overall, the HLTs of the late 1980s created value. We present quantitative and qualitative estimates of the~direct and indirect! costs of financial distress and their determinants. We estimate financial distress costs to be 10 to 20 percent of firm value. For a subset of firms that do not experience an adverse economic shock, financial distress costs are negligible.