Divest to Acquire

Abstract

Are divestitures only an ex-post reactive correction of past inefficient acquisitions or are they also an ex-ante proactive strategy to enhance the value of future acquisitions? We find support for the latter. Firms engaging in divestitures before making acquisitions obtain higher abnormal returns, especially in large acquisitions. These findings are not explained by management turnover or activist targeting. We provide evidence that the ‘divest to acquire’ motive ensures better performance of subsequent acquisitions and argue that divestitures and acquisitions are both critical components of a proactive approach to creating shareholder value.

Keywords: Divestitures, Acquisitions, M&A strategy, Empire building, CEOs

JEL Classification: G14, G23, G34