Valuation and Performance of Reacquisitions Following Equity Carve-Outs

Abstract:     
While previous literature reports a positive market reaction to parent companies conducting carve-outs, we find that the response to carve-outs that are ultimately reacquired is negative or insignificant. Reacquired units perform considerably worse than those that are not reacquired. Thus, parents may perceive that the market does not recognize the potential of these poorly performing units, and reacquires them to capitalize on the parents' private information. The reacquisition announcement results in a favorable market reaction for the parents and the units. However, parents experience negative long-term buy-and-hold abnormal returns when they reacquire less than 100% of units' shares.

Keywords: Equity carve-out, reacquisition, blockholder, initial public offering, parent-subsidiary merger

JEL Classification: G14, G34

Accepted Paper Series