Working Paper: NBER ID: w3484
Authors: Steven Kaplan; Michael S. Weisbach
Abstract: This paper studies a sample of large acquisitions completed between 1971 arid 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. Using the accounting gain or loss recognized by the acquirer, press reports, and the sale price, we characterize the ex post success of the divested acquisitions and consider only 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer arid target) returns at the acquisition announcement are significantly lower for unsuccessful acquisitions than for divestitures not classified as unsuccessful arid for acquisitions not divested. These results suggest that market reactions to acquisition announcements reflect expectations of future profits and that unprofitable acquisitions are recognized as such when initiated. Diversifying acquisitions are almost four times more likely to be divested than related acquisitions. However, we do not find strong evidence that diversifying acquisitions were less successful than related ones.
Keywords: Acquisitions; Divestitures; Market Reactions; Corporate Strategy
JEL Codes: G34; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unsuccessful acquisitions (G34) | acquirer returns (G34) |
| unsuccessful acquisitions (G34) | total returns (G12) |
| type of acquisition (G34) | likelihood of divestiture (G34) |
| diversifying acquisitions (G34) | divestiture likelihood (G34) |
| divested acquisitions (G34) | classification as unsuccessful (Y40) |