Takeover-divestiture combinations and shareholder wealth

Abstract

Situations in which a firm is taken over by another and then subsequently spun off are of interest, because it is not clear whether the spin off is the reversal of a bad decision or the second part of a deliberate action to extract value from the target firm. To explore these issues, we analyse the effect of the takeover and divestiture on the value of the firm that initiates these takeovers. There is a negative wealth effect for the firms that undertake these transactions upon the announcement of the takeover and a positive wealth effect for the spinoff. However, the combined wealth effect of the takeover and spinoff is not significant. Regressing this total ‘round-trip’ wealth effect for each firm on accounting and financial characteristics of the firm targeted in the takeover reveals a positive relation between total wealth effect and research and development expenditure in the target firm. The results are consistent with the hypothesis that takeover-divestiture combinations can increase shareholder wealth when they target firms that have growth opportunities that can be appropriated.