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Book part
Publication date: 19 September 2014

Olivier Bertrand, Marie-Ann Betschinger and Yulia Petrina

This paper investigates the relationship between divestiture activity and subsequent acquisition deal-making. We argue that the divestiture activity of firms influences…

Abstract

This paper investigates the relationship between divestiture activity and subsequent acquisition deal-making. We argue that the divestiture activity of firms influences their acquisition behavior through corporate restructuring learning effects and enhanced strategic flexibility. These organizational spillovers affect not only the degree of risk acquirers are ready to take but also their ability to effectively negotiate with the target firm. We test the existence of organizational spillovers for an international sample of 4,795 acquirers for the period 1990–2008 and get support for our theoretical predictions.

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Advances in Mergers and Acquisitions
Type: Book
ISBN: 978-1-78350-970-6

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Book part
Publication date: 31 August 2016

Patia J. McGrath and Harbir Singh

Firms operate in a market for their corporate assets, wherein important assets being bought and sold are business units. This market is therefore a primary mechanism for…

Abstract

Firms operate in a market for their corporate assets, wherein important assets being bought and sold are business units. This market is therefore a primary mechanism for firm reconfiguration, and offers the opportunity for firms to gain performance advantage as they prepare for and engage in their boundary-changing moves. This paper focuses on resource reconfiguration between firms, and examines internally and externally driven sources of performance heterogeneity in firms’ use of the market for firm reconfiguration. Viewing between-firm resource reconfiguration through three theoretical lenses surfaces several potential avenues for firm differentiation. For one, the necessity of firms’ possessing capabilities to execute both sides of the external resource reconfiguration transaction – acquisition and divestiture capabilities – is revealed. For another, the institutional prerequisites that are needed in the operating environment for a firm to build a sustainable resource reconfiguration strategy are brought to the fore, and are well illustrated by the private equity industry. Lastly, the potential benefits of using the transactional view of firm scope to animate the study of external resource reconfiguration are raised. Taken together, these elements lead to a research agenda around resource reconfiguration across firm boundaries.

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Resource Redeployment and Corporate Strategy
Type: Book
ISBN: 978-1-78635-508-9

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Article
Publication date: 13 October 2020

Rayenda Khresna Brahmana, Hui-Wei You and Xhin-Rong Yong

This study aims to examine the moderating role of chief executive officer (CEO) power on the relationship between divestiture strategy and firm performance by framing the…

Abstract

Purpose

This study aims to examine the moderating role of chief executive officer (CEO) power on the relationship between divestiture strategy and firm performance by framing the relationship under the agency and power circulation theories.

Design/methodology/approach

This study focuses on a sample of 319 non-financial public-listed companies in Malaysia from the year 2012–2016 and estimates the model under two-step generalized method of moments panel regression to eliminate the endogeneity issue.

Findings

The results show that divestiture strategy decreased the firm performance. Meanwhile, greater CEO power changed that divestiture effect but still failed to increase the performance. This study also indicates the CEO power strengthens the relationship between firm performance and divestiture.

Research limitations/implications

The overall findings show that the positive moderating role of CEO power on the relationship between divestiture and performance. This research confirmed the agency and power circulation theories by showing that CEO power can make divestiture strategy works. However, the moderating plot tells different. CEO power may strengthen the relationship between divestiture and performance; it fails to boost up the performance in overall. Therefore, this study is about CEO power on the strategic decision and gives a good implication for corporate governance concerning the impact of CEO power on the organization’s alignment process.

Originality/value

This study examines the effect of CEO power on the performance of divestiture strategy implementation by contesting the agency and power circulation theories within an emerging country context.

Details

Management Research Review, vol. 44 no. 3
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 9 December 2019

Sina Amiri, David King and Samuel DeMarie

There are multiple perspectives of divestiture and its performance that require reconciliation. While research finds a positive market response to divestment announcement…

Abstract

Purpose

There are multiple perspectives of divestiture and its performance that require reconciliation. While research finds a positive market response to divestment announcement, divestiture of prior acquisitions are generally viewed negatively. The purpose of this paper is to develop and empirically test different explanations for the divestment of prior acquisitions.

Design/methodology/approach

This research employs event study to capture market reaction at acquisition announcement and subsequent divestments in a sample of 69 public US high-technology acquisitions between 2003 and 2008 that were divested by 2015. Only initial acquisitions involving public firms were included from the Thomson One Banker SDC database. Public press releases and companies’ SEC filings were reviewed to track divestitures back to prior acquisitions. Ordinary least squared regression was used to estimate coefficients.

Findings

Results indicate a positive relation between acquisition and divestiture performance around announcement dates. This finding rejects the correction of mistake explanation, suggesting that a negative stigma surrounding divestments is largely unwarranted and that investors reward capable acquirer’s divestiture decisions.

Practical implications

Investors do not treat all information signals at divestiture equally. For example, acquisitions made by larger and more profitable firms, or acquisitions paid for with stock, are associated with lower return upon divestiture announcement.

Originality/value

This study finds that investors view divestiture as a proactive strategy, suggesting firms can improve performance by actively managing acquisitions and divestments to optimize their portfolio of businesses.

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Journal of Strategy and Management, vol. 13 no. 1
Type: Research Article
ISSN: 1755-425X

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Article
Publication date: 12 February 2018

Dung Pham, Thanh Nguyen and Hari Adhikari

The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity…

Abstract

Purpose

The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity carve-outs. The authors identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture.

Design/methodology/approach

The authors use the univariate tests, logistic regressions and buy-and-hold excess return computations to identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture.

Findings

The results show that industry concentration, relative “hotness” of the equity carve-out market, market values of divested units and firm’s growth opportunities are all positively related to the probability of an equity carve-out selection. In contrast, firms in financial service industry, firms that divest smaller units and firms with higher asymmetric information mainly choose to divest assets through asset sell-offs. The findings also indicate that firms with higher leverage and/or higher cash flow constraint show a stronger likelihood for choosing either the equity carve-out option or asset sell-off with cash payment over asset sell-off with stock payment. In the long run, firms that sell-off their assets experienced better performance relative to firms that choose to carve-out.

Research limitations/implications

The authors recognize several limitations of this study. First, the findings use the data collected in the US market. These findings may not be necessarily true to non-US firms. Therefore, one possible extension of this paper is to further examine the determinants that drive the methods of divestiture for non-US firms. Second, the authors have not examined the association between the choices of divestiture and the subsequent long-term operating performance of the firms. This could be another interesting direction for research in the future.

Practical implications

The findings have some implication for the divestiture literature by providing a set of determinants which play important roles on firms’ choice between an asset sell-off and an equity carve-out. The findings also have important implications for a potential acquirer who is interested in buying a firm’s subsidiary. Specifically, by analyzing the aforementioned influencing factors, the acquirer might foresee the possibility of a carve-out method and plan its bidding offer accordingly. From investors’ perspective, knowing which factors affect firms’ divesting methods and their subsequent long-run stock performance is undoubtedly beneficial to their investment strategies.

Originality/value

Prior research has attempted to address the reasons why firms divest or the outcomes of those actions. This paper focuses on the factors that influence the choice of sell-off versus carve-out once the decision to divest has been made. In addition, the authors look at a wide range of factors including industry-related, firm-specific, deal-related and market timing.

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Review of Accounting and Finance, vol. 17 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 August 2006

Jack Cao, Sian Owen and Alfred Yawson

To determine whether the abnormal returns accruing to UK companies undertaking a divestiture are different when the unit sold is in the UK or elsewhere and to specifically…

Abstract

Purpose

To determine whether the abnormal returns accruing to UK companies undertaking a divestiture are different when the unit sold is in the UK or elsewhere and to specifically hypothesize that returns generated by a domestic sale will be higher than those resulting from an overseas sale.

Design/methodology/approach

Using a sample of 668 divestitures reported on securities data corporation (SDC) Platinum database, and share price data from DataStream, both abnormal returns and cumulative abnormal returns (CARs) are calculated around the announcement date using the market model.

Findings

That the announcement of a divestiture generates positive abnormal returns for shareholders. Further, that the announcement of a UK divestiture generates a significantly larger positive market reaction than the announcement of an overseas divestiture. For the divestiture of units located outside the UK it is found that the largest CARs are generated when the buying firm is based in the UK.

Originality/value

Here the existing work on divestiture announcement effects is extended by taking into account the location of the divested unit and the location of the buying firm. This allows one to investigate whether market reaction to an announcement of a divestiture is influenced by both the location of the unit sold and the location of the buying company.

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Management Research News, vol. 29 no. 8
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 1 January 1996

Timothy E. Burson and Robert L. Lippert

The history and divestiture of the Bell System is of immediate importance to several economies around the globe, especially those undergoing the change from state owned…

Abstract

The history and divestiture of the Bell System is of immediate importance to several economies around the globe, especially those undergoing the change from state owned operations to private ownership. Similarly, those economies experiencing rapid expansion of telecommunications can also learn from the experiences of AT&T's development, maturity, and subsequent divestiture. In addition to a brief history, this study examines preliminary empirical evidence which suggests agency costs, particularly those associated with free cash flow, were reduced following the divestiture.

Details

Studies in Economics and Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 12 February 2018

Enzo Peruffo, Lucia Marchegiani and Francesca Vicentini

This paper aims to analyse the idea that experience acts as an antecedent in divestiture and triggers an organisational learning process that enables the divesting firm to…

Abstract

Purpose

This paper aims to analyse the idea that experience acts as an antecedent in divestiture and triggers an organisational learning process that enables the divesting firm to convert experience into knowledge, increasing the probability that a firm will undertake subsequent divestitures.

Design/methodology/approach

The approach is quantitative. The research project used a case–control design, with a sample consisting of 274 divesting and non-divesting firms. Given the dichotomous nature of the dependent variable, the relations of the research model are tested using logistic regression.

Findings

The likelihood of a divestiture increases when firms have already had past experience of divestitures. Firm performance and firm size act as moderating variables, that is, the learning effects are weaker in firms with better past performance and also in larger firms.

Research limitations/implications

The study contributes to the literature on organisational learning and divestiture. In particular, the knowledge obtained from previous divestitures is positively related to subsequent ones. The results on firm size and performance as contingency factors make it possible to distinguish between the different learning mechanisms in proactive and reactive divestitures, as well as in larger and smaller firms. Accordingly, a two-level framework of experience and knowledge is proposed.

Practical implications

The results are of interest for practitioners who need a better understanding of the antecedents of their strategic actions in terms of past experience and knowledge. The study also offers insights into the knowledge management practices that fit into the proposed two-level framework of knowledge accumulation.

Originality/value

The originality of the study consists in the strong evidence of learning effects in divestitures that it finds. This study augments a promising line of research on the effect of experience in rare strategic decisions, enriching our understanding of the learning mechanisms associated with complex experiences.

Details

Journal of Knowledge Management, vol. 22 no. 2
Type: Research Article
ISSN: 1367-3270

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Article
Publication date: 1 March 2004

Venkat R. Krishnan and Ranjini Sivakumar

This longitudinal study looked at the impact of top managers’ personal power and structural power on divestiture two years later, using a sample of 46 sales and spin‐offs…

Abstract

This longitudinal study looked at the impact of top managers’ personal power and structural power on divestiture two years later, using a sample of 46 sales and spin‐offs and a set of 46 control firms matched by size and industry in the USA. The impact of divestiture on top managers’ power during the two years following the divestiture was also looked at. Results of pair‐wise matched t‐tests reveal that firms whose top managers have less structural power are more likely to divest one year later. Logistic regression analysis shows that top managers’ structural power continues to predict divestiture one year later, even after controlling for change in net income and change in earnings per share. Divestiture also seems to result in less structural power of top managers during the two years after divestiture.

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Corporate Governance: The international journal of business in society, vol. 4 no. 1
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 18 May 2010

Matthias Brauer and Markus Schimmer

The paper aims at extending extant research on sources of divestiture gains by suggesting a novel program‐based perspective on divestitures and analyzing the performance…

Abstract

Purpose

The paper aims at extending extant research on sources of divestiture gains by suggesting a novel program‐based perspective on divestitures and analyzing the performance of program divestitures in comparison to single “stand‐alone” divestitures.

Design/methodology/approach

Based on event study methodology, the authors analyze the abnormal returns of 160 divestiture announcements within the global insurance industry between 1998 and 2007. In contrast to prior research which relied on ex post statistical clustering to identify transaction programs, ad hoc corporate press releases issued with the divestiture announcements are used to categorize program divestitures.

Findings

Empirical results suggest that program divestitures generate higher abnormal returns than stand‐alone divestitures. Further analyses into the sources for these higher gains, however, do not provide support for experience effects as significant explanatory factors. Instead, results suggest that the scheduling of divestitures significantly impacts announcement returns.

Research limitations/implications

The scope and single industry setting of the study suggest future cross‐industry research on the influence of divestiture program characteristics on divestiture performance and the conditions under which these programs improve divestiture performance.

Practical implications

Managers are advised to refrain from piecemeal divestiture behavior lacking clear strategic focus. Instead, they are encouraged to bundle their divestitures as part of a divestiture program with a clear strategic intent and shared business logic.

Originality/value

While prior research on divestitures has treated divestitures as isolated events, the paper directs attention towards the analysis of divestiture programs. Further, experience and timing effects, which have been widely absent from prior divestiture studies, are considered.

Details

Journal of Strategy and Management, vol. 3 no. 2
Type: Research Article
ISSN: 1755-425X

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1 – 10 of over 1000