The effect of related versus unrelated acquisition-divestiture transactions on the market values of acquiring and divesting firm : an event study

Abstract

Building on research from the marketing, management and finance disciplines, the proposed research considers the effect of acquisition and divestiture decisions on the market value of firms. Specifically, the primary research questions to be addressed are: 1. What types of divestitures of business units by a diversified multibusiness firm are perceived favorably by the capital market (i.e., as strategic actions conducive to superior future performance)? 2. What types of acquisitions of business units (divested by another firm) are perceived favorably by the capital market (i.e., as strategic actions conducive to superior future performance)? 3. What effect does the type of relatedness of the divested business unit to the firm's core business (and/or other businesses in the firm's portfolio) have on the change in the market value of the firm? 4. What effect does the type of relatedness of the acquired business unit to the firm's core business (and/or other businesses in the portfolio) have on the change in the market value of the firm? 5. How does relative size of the divested/acquired unit influence the market value of the transaction? An event study methodology is used to examine the relationship between strategy choice (acquisitions and divestitures) and performance. Strategy choice is assessed by classifying the acquisitions and divestitures of business units into related and unrelated categories. The findings support the hypotheses that firms can increase their market value by expanding into product-markets that are related to that firm's core competencies and/or from exiting from product-markets unrelated to those core competencies. The change in market value associated with an unrelated divestiture-related acquisition dyad was found to be greater than the change in market value associated with other dyads examined, with the exception of the unrelated divestiture-unrelated acquisition dyad.