Corporate Divorces: An Economic Analysis of Divested Acquisitions

Abstract

This study examines implications for mergers and acquisitions (M&As) by focusing on deals that are subsequently divested. A comprehensive data set on the corporate divorce phenomenon during the past quarter of a century is constructed with financial news as well as SEC filings. Using this sample, there two main reasons for divesting acquisitions: limited pre-acquisition due diligence and post-acquisition disruption due to poor match. In total, 46% of M&As are divested subsequently. The divestiture rate varies over time trend, e.g., more subsequent divestitures occur following merger waves, and industry, e.g., lower divestiture rates are observed if firms operate in the same or complementary industry. Generally, divestitures cannot be predicted ex-ante, but they happen more often if the target industry is performing poorly, and less often if the acquirer firm and target firm share some cultural similarity. Given that up to 77% of divorces can be attributed to M&A failure, and hence a creative destruction, the analysis has important implications for our understanding of the economic forces behind the significant takeover dynamics of Corporate America.

Keywords: JEL Classification: D80, G14, G34 mergers and acquisitions

JEL Classification: D80, G14, G34