Asset divestiture following horizontal acquisitions: a dynamic view

Abstract

Business acquisition, resource redeployment, and asset divestiture are elements of a dynamic process in which firms change their businesses by recombining internal and external resources. Analyzing 253 horizontal acquisitions, we show that post-acquisition resource redeployment leads to asset divestiture from the business that receives the redeployed resources, but not from the business that contributes the new resources. Consistent with scale economies rationales, we find that strategic similarity also leads to greater asset divestiture from the target firms. Many theoretical perspectives are skeptical about the positive rationale for acquisitions and many of these believe that asset divestiture is evidence of acquisition failure. Our arguments and analysis help refine the accepted wisdom. In particular, the pattern of resource redeployment and asset divestiture in our analysis suggests that acquisitions provide a means of reconfiguring the structure of resources within firms and that asset divestiture is a logical consequence of this reconfiguration process. CopyrightThis study examines the causes of asset divestiture following horizontal acquisitions. Asset divestiture is the partial or complete sale or disposal of physical and organizational assets, shut down of facilities, and reduction of work forces of target or acquirer businesses. Post-acquisition asset divestiture has long represented a substantial fraction of M&A activity (Gilmour, 1973). In the 1980s and early 1990s, about 35 to 45 percent of reported M&As were divestitures of previously-acquired units by other firms (Weston, 1994). Similarly, Porter (1987) and Ravenscraft and Scherer (1987) report a high incidence of post-acquisition divestiture. Scholars often argue that the high rate of post-acquisition divestiture is evidence of acquisition failure, but this conclusion has two key limits. First, prior research emphasizes divestiture of target business assets, with little attention to postacquisition divestiture of the assets of acquiring businesses. Second, and perhaps most critically, the research under-emphasizes the positive side of post-acquisition divestiture as part of the dynamic process of business change.Our research tests a more positive view of asset divestiture following horizontal acquisitions. The study departs from previous research in two ways. First, we develop the idea that divestiture is often part of the reconfiguration of the merging firms. Second, we examine divestiture of both acquirer and target assets. In this approach, we emphasize partial divestiture of target and acquiring business assets following horizontal acquisitions, as firms retain and integrate some elements of target businesses within their existing businesses. Our arguments contrast with the negative perspectives on horizontal acquisitions and post-acquisition divestitures that have dominated the traditional anti-trust literature as well as some managerial critiques. 818L. Capron, W. Mitchell and A. Swaminathan This work extends recent research that pro...

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