Divestiture of prior acquisitions: competing explanations of performance
Journal of Strategy and Management
ISSN: 1755-425X
Article publication date: 9 December 2019
Issue publication date: 25 February 2020
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.
Keywords
Acknowledgements
The authors appreciate feedback on earlier versions of this paper at the Midwest Strategy Meeting at the University of Kansas, and during the Academy of Management Annual Meeting. The authors are also grateful to Joseph Mahoney and Michael Ryall for their peer-reviews and constructive feedback. Further, the authors would like to thank Arnold Cowan for his kind assistance with the event study analyses. Finally, the authors appreciate editorial advice of Nicholas O’Regan, and blind reviewers that helped the authors improve upon the initial submission.
Citation
Amiri, S., King, D. and DeMarie, S. (2020), "Divestiture of prior acquisitions: competing explanations of performance", Journal of Strategy and Management, Vol. 13 No. 1, pp. 33-50. https://doi.org/10.1108/JSMA-05-2019-0076
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited