Corporate expansion is usually the goal of mergers and acquisitions (M&A). However, corporations sometimes have to decrease and downgrade their operations.
This need may emerge on the grounds that a division of the organization is performing inadequately. Or basically, in light of the fact that it no longer fits into the association’s arrangements.
The restructuring may also be important to fix a past merger or acquisition that was ineffective. It is a fact that a lot of sell-offs are primarily caused by budgetary problems.
A mix of high leverage and weak industrial need is the primary cause of budgetary problems. However, there’s also the truth that the amount of sell-offs rises when general arrangement volume heightens.
With that said, the sell-off deal volume will, in general, follow the ups and downs of the economy. It is the same when M&As follow the by and large patterns of economic variations.
This is what happened in the USA. It also happened to larger continents such as Asia and Europe.
What is Divestiture?
Divestiture is not the only type of corporate restructuring. There are other types of corporate restructuring. We learned about the different types in a previous article.
A divestiture is a deal of a segment of the firm to an external party. Generally, they pay the selling firm in cash, marketable protections, or a mix of the two.
A decision-making method for attaining divestiture is developed and used to know if a certain portion of the firm is worth retaining. Both of the divesting and acquiring companies mutually will make the same analysis with different results. This is while they are viewing the deal from opposite sides. The two parties may decide on different values even if the methods are similar. This is because they utilize different assumptions and judgments or they have different needs.
Divestitures
Sell-offs are typically divestitures. But companies also acquire other sell-off types, like a carve-out or equity. They aim to make the purchase tax-free which may call for a spinoff.
The most widely recognized type of divestiture includes the offer of a division of the parent company to another company. The cycle is a type of withdrawal for the selling company but a way of expansion for the buying company.
Divestiture Trends
During the third merger wave in the 1960s, there was a small number of divestitures and selloffs. Firms were busy engaging in huge expansions. And using the acquisition of other firms to build up the acquiring corporation’s stock price.
This development went to a sudden end due to changes in the tax laws. Another reason was administrative measures, alongside the decline in the stock market.
There became a reconsideration of the acquisitions that were proven to be helpless combinations. A need increased by the recession from 1974 to 1975. Due to the weak economic demand, divisions were sold off by firms to earn funds and improve their cash flow.
Global competition also encouraged some 1960s firms to keep up through sell-offs of prior acquisitions that used to be weak in the world market.
This inversion of the obtaining pattern was noticeable as early as 1971. This is when divestitures hopped to 42% of total exchanges.
The pattern peaked in 1975, a time of monetary downturn, when the amount of divestitures established 54%, all transactions considered. They stayed somewhere in the range of 35% and 40% all through the 1980s.
But in the fifth merger wave, merger wave, the quantity of divestitures rose again. This happened as scaling back and refocusing became noticeable business techniques. At the point when the volume of overall deals debilitated toward the end of the wave, divestiture volume eased back. But it bounced back again during the 2000s, when the M&A action continued.
Divestiture in 1960s and mid 70s
Most divestitures are products of sell-offs of late acquisitions. The extreme time of the merger movement of the latter part of the 1960s. It was reflected in a pronounced peak at this time, followed by a peak in the divestiture bend in the mid 1970s. It was one factor that affected this volume is the stock market.
In a study by Linn and Rozeff, it was found that in years that the stock market was down, the volume of divestiture was way lower than expected given the previous merger rates. But when the market was performing well, so did divestitures.
This case is not limited to the USA. Europe and Asia also have a strong similarity among the variations in the divestiture volumes. A slight difference, however, is when the total divestitures in Europe and Asia increased.
It increased during the fifth merger wave’s second half that they did in the United States. All of them declined when the economy declined too in 2000-2001. However, it increased again in 2003. This is especially true for Europe.
The Probability of Divestiture of Prior Acquisitions
In a study by Kaplan and Weisbach, they investigated 271 large acquisitions between 1971 and 1982. They found that 43.9%, or 119, of these acquisitions, were divested by 1982 with an average of seven years. They also analyzed the patterns in the activities that became the cause of sell-offs.
According to the results, diversifying acquisitions are more likely to be divested. This is compared to those that are not. It also complements other evidence about the benefits of acquisition programs.
Involuntary Divestiture
Divestiture can be divided into voluntary or involuntary. An involuntary divestiture occurs when the firm accumulates a negative review.
They may require the company to divest itself of a certain portion. For instance, in June 1987, the Interstate Commerce Commission (ICC) decided that the merger of the Santa Fe and Southern Pacific railway systems might weaken competition.
There had been a merger between Santa Fe and Southern Pacific in 1983. This happened as they waited for an antitrust investigation and decision from the ICC. The ICC had antitrust jurisdiction for this type of merger.
After this, the ICC required the Santa Fe-Southern Pacific to send a divestiture plan within 90 days. This had very bad repercussions on the stock price of Santa Fe and made the company a target of a bid by the Henley Group.
© Image credits to Anni Roenkae