Divisional buyouts by private equity and the market for divested assets

Abstract

We study the role and performance of private equity (PE) in corporate asset sales. Corporate sellers obtain significantly positive excess returns in PE deals, gains in wealth significantly greater than for intercorporate asset sales. Based on exit valuations for 98% of PE deals, we find gains in enterprise value in buyouts are significantly greater than for benchmark firms. Corporate seller excess returns are positively correlated with subsequent gains in asset enterprise value. A parsimonious auction model suggests that only restructuring capabilities of PE (not acquisition of undervalued assets) can explain the pattern of the gains generated in these PE deals.Keywords: Divisional buyouts, asset sales, private equity, restructuring, auction.JEL classification: G32, G34. Divisional Buyouts by Private Equity and the Market for Divested Assets AbstractWe study the role and performance of private equity (PE) in corporate asset sales. Corporate sellers obtain significantly positive excess returns in PE deals, gains in wealth significantly greater than for intercorporate asset sales. Based on exit valuations for 98% of PE deals, we find gains in enterprise value in buyouts are significantly greater than for benchmark firms. Corporate seller excess returns are positively correlated with subsequent gains in asset enterprise value. A parsimonious auction model suggests that only restructuring capabilities of PE (not acquisition of undervalued assets) can explain the pattern of the gains generated in these PE deals. Divisional Buyouts by Private Equity and the Market for Divested Assets

The impact of divestitures on shareholder wealth – The DACH case

“…Since financial investors tend to search for undervalued assets on the basis of superior information, which indicates low interest from strategic buyers and consequently weak seller bargaining power, the authors expect a low acquisition price in the case of a financial buyer and consequently lower ARs. Hence, they do not follow the argumentation by John and Ofek (1995) and Hege et al (2018), but, like Stienemann (2003) and Bartsch (2005), expect the positive effect of potential synergies to outweigh the advantage of the financial strength of financial investors.…”

“…Afshar et al , 1992; John and Ofek, 1995; Kaiser and Stouraitis, 1995; Datta and Iskandar-Datta, 1996; Daley et al , 1997; Desai and Jain, 1999; Löffler, 2001; Bergh et al , 2008; Coakley et al , 2008; Chen and Feldman, 2018). However, there are also a few researchers who find no evidence for a positive effect, for example Wang (2000); Alexandrou and Sudarsanam (2001); Eichinger (2001); Clayton and Reisel (2013); Hege et al (2018) and Finlay et al (2018). Bartsch (2005) and Bergh et al (2019) even find a negative relationship.…”

“…Whereas the argumentation regarding strategic fit is generally accepted, there are contrasting arguments as to whether a financial or a strategic buyer should be preferred in terms of shareholder wealth maximization. On the one hand, John and Ofek (1995) and more recently Hege et al (2018) would expect ARs to be higher if the buyer is a leveraged buyout group, because it can improve the performance of the divested asset due to better corporate governance structures, better managerial and restructuring capabilities that are difficult to replicate for strategic buyers, as well as more aggressive incentives. Similar to the strategic fit, the efficiency gains may be shared with the seller.…”

Financial versus strategic bidders and underpricing as an acquisition motive

“…One is the operational improvements that financial acquirers can implement after the acquisition. Existing studies show that they are especially good at acquiring poorly managed firms and improving their operations and governance (Gorbenko & Malenko, 2014;Hege et al, 2018).…”

“…More precisely, this paper complements the findings in Malmendier et al (2016) who show that revaluations, in a sample composed mostly of strategic bidders, are induced by the choice of cash as a medium of payment. They argue that bidders, by choosing to 9 Papers that study differences between financial and strategic bidders often evaluate announcement returns and relate them to the identity of the acquirer (Bargeron et al, 2008;Dittmar et al, 2012;Hege et al, 2018). From a different perspective, Gorbenko and Malenko (2014) study competition and bids within each auction and Fidrmuc et al ( 2012) compare the selling process of firms acquired by strategic acquirers to that of financial acquirers.…”