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, the long-term success of M&As can be evaluated based on the companies' pre-M&A status and post-deal development as divorced targets are qualitatively traceable. In total, 46% of M&As are divested subsequently, however, the trend is decreasing as informational efficiency increased from the 1970s and early 1980s. Besides ex-ante information asymmetries, ex-post industry shocks are associated with the incidence of a divorce. Given that up to 77% of divorces can be attributed to M&A failure, and hence creative destruction, we find that cultural dissimilarities are especially responsible for divorces and their lack of success. The analysis has important implications for our understanding of the economic forces behind the significant takeover dynamics of Corporate America.

Keywords: Mergers and acquisitions, Divestitures, Restructuring

JEL Classification: D80, G14, G34