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The Success of Acquisitions: Evidence From Disvestitures

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  • Steven Kaplan
  • Michael S. Weisbach

Abstract

This paper studies a sample of large acquisitions completed between 1971 arid 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. Using the accounting gain or loss recognized by the acquirer, press reports, and the sale price, we characterize the ex post success of the divested acquisitions and consider only 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer arid target) returns at the acquisition announcement are significantly lower for unsuccessful acquisitions than for divestitures not classified as unsuccessful arid for acquisitions not divested. These results suggest that market reactions to acquisition announcements reflect expectations of future profits and that unprofitable acquisitions are recognized as such when initiated. Diversifying acquisitions are almost four times more likely to be divested than related acquisitions. However, we do not find strong evidence that diversifying acquisitions were less successful than related ones.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3484.

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Date of creation: Oct 1990
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Publication status: published as The Journal of Finance, Vol. XLVII, No. 1, pp. 107-138, (March 1992).
Handle: RePEc:nbr:nberwo:3484

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  1. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 431-460, January.
  2. Klein, April, 1986. " The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects," Journal of Finance, American Finance Association, American Finance Association, vol. 41(3), pages 685-96, July.
  3. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(1), pages 7-20, Winter.
  4. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 461-492, January.
  5. Mitchell, Mark L & Lehn, Kenneth, 1990. "Do Bad Bidders Become Good Targets?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 372-98, April.
  6. Scherer, F M, 1988. "Corporate Takeovers: The Efficiency Arguments," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(1), pages 69-82, Winter.
  7. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 31-48, March.
  8. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(1), pages 21-48, Winter.
  9. J. Fred Weston, 1989. "Divestitures: Mistakes Or Learning," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 2(2), pages 68-76.
  10. Jain, Prem C, 1985. " The Effect of Voluntary Sell-off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 209-24, March.
  11. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 375-90, June.
  12. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 5-50, April.
  13. Eckbo, B. Espen & Langohr, Herwig, 1989. "Information disclosure, method of payment, and takeover premiums : Public and private tender offers in France," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 363-403.
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