The Effect of Voluntary Spin-off Announcements on Shareholder Wealth

Miles, James A.; Rosenfeld, James

doi:10.2307/2327589

Cited by 188 publications

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“…3 Investors typically respond favorably to the expected long-run benefits of divestitures, such that the divesting firm's stock market performance improves upon divestiture announcements (Miles and Rosenfeld 1983, Schipper and Smith 1983, Markides 1992, Lang et al 1995. Because investors will expect similar long-term improvements in companies that undertake legacy divestitures, especially when the divesting firms are highly diversified and when the divested units operate in declining industries or perform poorly, investors should also react favorably to announcements of these transactions.…”

Section: Legacy Divestitures: Motivesmentioning

confidence: 99%

Legacy Divestitures: Motives and Implications

Feldman

2014

Organization Science

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This paper investigates "legacy divestitures," the sale or spinoff of a company's original, or "legacy," business. The central tension considered in this work is that the historical presence of a firm's legacy business should simultaneously make that unit very interdependent with the company's remaining operations and make the firm's managers highly likely to take those same interdependencies for granted. Consistent with these predictions, the post-divestiture operating performance of firms that divest their legacy businesses falls short of that of firms that retain comparable legacy units, especially when the divested unit operates in the same industry as others of the divesting firm's businesses. Newer chief executive officers (CEOs) are more likely to undertake legacy divestitures than their longer-tenured peers, and the most recently appointed CEOs undertake the most costly legacy divestitures. In summary, this paper provides insights into how historical interdependencies create value in diversified firms, as well as the decision-making processes that managers follow in overseeing these companies. Abstract This paper investigates "legacy divestitures," the sale or spinoff of a company's original, or "legacy" business. The central tension considered in this work is that the historical presence of a firm's legacy business should simultaneously make that unit very interdependent with the company's remaining operations and make the firm's managers highly likely to take those same interdependencies for granted. Consistent with these predictions, the post-divestiture operating performance of firms that divest their legacy businesses falls short of that of firms that retain comparable legacy units, especially when the divested unit operates in the same industry as others of the divesting firm's businesses. Newer CEOs are more likely to undertake legacy divestitures than their longer-tenured peers, and the most recently-appointed CEOs undertake the most costly legacy divestitures. In sum, this paper provides insights into how historical interdependencies create value in diversified firms, as well as the decision-making processes managers follow in overseeing these companies.

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Section: Legacy Divestitures: Motivesmentioning

confidence: 99%

Legacy Divestitures: Motives and Implications

Feldman

2014

Organization Science

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“…This implies that the employees lose their outside option when they bargain with the post-merger firm. 16 Notably, the merger not only eliminates the outside option of the employees, but it also creates an outside option for the post-merger firm. This is because when both employees are successful, the firm has two employee innovations to choose from.…”

Section: The Mergermentioning

confidence: 99%

“…16 Recall that our assumption that the merger eliminates competition in the product market and employee outside option is for analytical tractability. All we need for our results is that the merger reduces competition in the final good market and in the market for employee human capital.…”

Section: The Mergermentioning

confidence: 99%

“…The third factor is negative, and due to the impact of an increase in δ i on firm ex post payoffs from employee innovations. A greater value of δ i increases the rent extraction ability of employee i and, therefore, lowers firm i s ex-post payoff, as reflected by the term M − βδ i in (16). All else equal, the cost of increasing δ i for firm i, in terms of the loss of rents to the employee, is smaller for lower values of employee bargaining power β.…”

Section: Human Capital Mobilitymentioning

confidence: 99%

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Mergers, Spinoffs, and Employee Incentives

Fulghieri¹,

Sevilir

2011

Rev. Financ. Stud.

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This paper studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives. In industries where value creation depends on innovation and development of new products, mergers are likely to be inefficient even though they increase the market power of the post-merger firm. In such industries, a stand-alone structure where independent firms compete both in the product market and in the market for employee human capital leads to a greater profitability. Furthermore, our analysis shows that multidivisional firms can improve employee incentives and increase firm value by reducing firm size through a spin-off transaction although doing so reduces the benefits of operating an internal capital market within the firm.To be presented at the AFA 2010 meetings. We thank seminar participants at ESMT, Oxford University and University of Virginia for useful comments. All errors are our own.

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“…A leveraged buy-out means that a business is sold to an investor group which typically includes the sold unit's former managers. A carve-out is a sale of a business unit to new shareholders or another firm (Makhija, 2004;Miles & Rosenfeld, 1983;Woo, Willard, & Daellenbach, 1992). An asset sale means that a firm agrees to sell all or certain assets and liabilities to a buying company.…”

Section: Defining the Domainmentioning

confidence: 99%

Thirty Years After Michael E. Porter: What Do We Know About Business Exit?

Decker

Mellewigt

2007

AMP

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Executive OverviewAlthough a business exit is an important corporate change initiative, the buyer's side seems to be more appealing to management researchers than the seller's because acquisitions imply growth, i.e., success. Yet from an optimistic viewpoint, business exit can effectively create value for the selling company. In this paper we attempt to bring the relevance of the seller's side back into our consciousness by asking: What do we know about business exit? We start our exploration with Porter (1976), focusing on literature that investigates the antecedents of, barriers to, and outcomes of business exit. We also include studies from related fields such as finance and economics. 1 Through this research we determine three clusters of findings: factors promoting business exit, exit barriers, and exit outcomes. Overall, it is the intention of this paper to highlight the importance of business exit for research and practice. Knowing what we know about business exits and their high financial value we should bear in mind that exit need not mean failure but a new beginning for a corporation.B usiness exit is an asset restructuring activity involving a diversified firm's divestiture of one of its businesses, such as Intel's abandonment of its DRAM business (Burgelman, 1996). Interest in this topic can be traced back to publications that represent milestones in economic research such as Bain (1956), who established the concept of barriers to entry, Caves ' (1964) analysis of the American industry, and the seminal article on exit barriers by Porter published in California Management Review in 1976, which helped raise the interest in business exit among a broad audience. Data from the U.S. illustrate that business exit continues to be relevant (cf. Figure 1). In the U.S., business services, real estate, and software were the most active divesting industries in 2005. A recent study by the consulting company Accenture highlights the growing relevance of business exits for years to come and predicts that " [f]or the next years, many companies will give far more thought to divestitures than they did in the late 1990s" (Anslinger, Jenk, & Chanmugam, 2003).Although a business exit is an important corporate change initiative, the buyer's side seems to be more appealing to management researchers than the seller's because acquisitions imply growth, i.e., success. This preference for the "success" side can be seen at the industry level as well. Managers, for example, may resist business exit because it is afflicted with the stigma of failure and is often seen as a result of poor corporate management. The reluctance of managers to admit that their organization or at least parts of it are in trouble is evidence of their substantial personal preoccupation with growth and their large personal costs in case of exit (Gilson, 1989). Yet from an optimistic point of view, business exit can effectively create value for the selling company. Indeed, the stigma certainly wasn't a factor for former GE CEO Jack Welch. Under his leadersh...

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The Effect of Voluntary Spin-off Announcements on Shareholder Wealth

Cited by 188 publications

References 0 publications

Legacy Divestitures: Motives and Implications

Legacy Divestitures: Motives and Implications

Mergers, Spinoffs, and Employee Incentives

Thirty Years After Michael E. Porter: What Do We Know About Business Exit?

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