Disinvestment represents a subset of the universe of restructuring strategies available to firms. Restructuring encompasses a range of initiatives, some of which include changes in the ownership and financing structure. The term disinvestment as used here is restricted to decisions which involve only changes in asset structure. From a balance-sheet perspective, we restrict the term to transactions immediately involving changes in the composition of assets rather than transactions also involving changes in financing and ownership structure. In this framework, sell-offs (including both dive stitures and liquidations), plant closings, and abandonments are considered disinvestments, whereas spin-offs, split-offs, and equity carve outs are not.
Among voluntary disinvestment decisions, the most frequent transactions are sell-offs, where one asset is substituted for cash or securities. T he subsequent use of the proceeds is related to the type of disinvestment decision. In the extreme case, voluntary liquidations of firms are transactions where sell-offs generate cash, and the residual cash is distributed to stockholders after all other obligations have been met. More frequently, firms sell only a portion of the firm’s assets in a transaction known as a divestiture. The discussion that follows focuses on the issues surrounding divestitures only.
The earliest empirical study examining the divestiture of corporate assets was conducted by Boudreaux (1975). This study found there “was an unusually positive price movement in a firm’s common stock” for the three months previous through the month following announcement of divestiture. This foundational work provided the first evidence that divestment decisions could be shareholder wealth enhancing.
The first published studies using contemporary statistical techniques were by Alexander et al. (1984) and Jain (1985). Using event-study methodology, Alexander et al. (1984) found positive abnormal returns to sellers over a number of intervals. Jain (1985) found similar results, and also found evidence that buyers al so gained (although, as in mergers, not to the extent that sellers did).
There are many possible driving forces motivating divestiture decisions. Perhaps the most widely cited is that of “efficient redeployment . ” This concept (closely related to the concept of “synergy” in mergers) implies that asset sales need not be a zero-sum game between the seller and acquirer. In this paradigm, the selling firm may not have sufficient resources or complementary assets to extract the full potential of the asset under question. By selling the asset to another firm having these missing attributes, the asset increases in value. This implies the possibility of both parties benefiting from the transaction. Evidence in support of mutually beneficial transactions has been found in a number of studies (see Jain, 1985; Sicherman and Pettway, 1992).
The strongest evidence that gains to divesting firms accrue from perceptions of potential synergies (as opposed to some “information effect”) comes from Hite et al. (1987). They examined both partial sell-offs and total liquidations. In their liquidation sample, average abnormal returns to selling firms were 33 percent. In the partial sell-off sample, Hite et al. (1987) examined both completed transactions, and those which were announced but subsequently canceled. They found that dive sting firms’ gains upon announcement were maintained only if the transaction was actually consummated.
Related to the efficient redeployment motive is the divestment of unrelated business units. The potentially negative effects for shareholders of acquirers purchasing firms in unrelated lines of business is well known. Firms’ diversification-related investments in areas outside their core business areas generally provide more benefit to managers than to shareholders. Divesting these unrelated assets limits the potential agency costs and results in increased focus of managerial and financial resources. John and Ofek (1995) provide evidence that focus-increasing divestitures of unrelated operations result in higher announcement returns.
The financing hypothesis (as formalized in Lang et al., 1995) contends that asset sales are often used to provide sources of capital. Wh en financial constraints limit firms’ effective access to traditional capital markets, asset sales may be the only feasible source of financing available. However, knowledge of the firm’s financial condition prior to the asset sale significantly affects the relative bargaining positions (and hence the relative gains) of the transacting firms. Firms with recent bond downgrades in the period prior to asset sales are often forced to sell at a bargain price. This results in a larger share of any redeployment gains going to the acquiring firm (see Sicherman and Pettway, 1992).
Finally, current research indicates that asset sales may be driven by the presence and resolution of informational asymmetries. In the presence of informational asymmetry between corporate insiders and the market re garding the true value of the firm’s assets in place, asset sales may be the only feasible means of raising capital while avoiding the mispricing problems detailed in Myers and Majluf (1984). The firm may be able to credibly convey private information regarding individual corporate assets to potential buyers. Additionally, if the market rationally expects the firm to sell its most overpriced asset (and therefore to retain its most undervalued assets), asset sales may provide sufficient information for the market to resolve the undervaluation of the firm’s remaining operations. DaDalt et al. (1996) found that divesting firms with potentially high levels of information asymmetry (those not followed by security analysts) have announcement period returns several times greater than firms followed by one or more analysts.
