Management Buyouts of Divisions and Shareholder Wealth

Hite, Gailen L.; Vetsuypens, Michael R.

doi:10.1111/j.1540-6261.1989.tb02632.x

Cited by 66 publications

(42 citation statements)

References 30 publications

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“…Refinancing of redeemed issues places long-term cost burden on the parent firm (Chatfield & Moyer, 1986). Although, DBO is expected to provide operational benefits to the parent firm (Hite & Vetsuypens, 1989), the parent firms with ERC bonds outstanding are likely to face enormous long-term refinancing cost of these bonds. In analyzing the long-term performance of a sample of 46 parent firms with DBO that had ERC bonds outstanding at the DBO, I find that the refinancing cost of ERC protected bonds overshadows any operational benefits of the DBO.…”

Section: Resultsmentioning

confidence: 99%

“…Due to the transfer of wealth from bondholders to stockholders, the lower bond values result into higher returns for the common stockholders. Hite and Vetsuypens (1989) find that the shareholders of the parent firms, undergoing DBO, experience positive and significant wealth effect at the announcement of the DBO.…”

Section: Introductionmentioning

confidence: 83%

“…According to Hite and Vetsuypens (1989), the benefit to the parent firms undergoing DBO accrues largely from the improved efficiency and lower complexity of the decision-making for the management of the firm. The expected result after the sale of the division for the parent firm is a smaller, efficient, and more manageable firm.…”

Section: Dbo and The Parent Firmmentioning

confidence: 99%

“…The expected result after the sale of the division for the parent firm is a smaller, efficient, and more manageable firm. The shareholders of the parent firm, undergoing DBO experience positive wealth effect at the announcement of the DBO (Hite & Vetsuypens, 1989). In contrast the bondholders of the parent firms are susceptible to a significant loss of wealth due to the transfer of wealth from bondholders to stockholders.…”

Section: Dbo and The Parent Firmmentioning

confidence: 99%

“…The net effect of a DBO on the capital structure of the new firm is a substantial increase in the level of debt on the firm's books since the assets of the new firm, including the future cash flows, are used as collateral for the loans obtained in the DBO. The DBOs are motivated by an opportunity to increase the efficient use of assets for the division at the same time improving the effectiveness and efficiency of decision making for the slimmer parent firm (Hite & Vetsuypens, 1989). The long-term performance of parent firms after the DBO has remained unexplored in the literature.…”

Section: Introductionmentioning

confidence: 99%

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Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

Tewari¹

2013

IBR

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The focus of this paper is to assess the long-term common stock performance of the parent firms that underwent divisional buyout (DBO) and had event risk covenant (ERC) bonds outstanding at the announcement of the DBO. The final sample of 46 parent firms exhibit a common characteristic where all the ERC bonds were redeemed (either called above par or put on the firm at par) or restructured at a higher cost to the firm around DBO announcement date due to the presence of ERCs. ERCs are triggered since the parent firms that divest their assets through a DBO reveal future cash flow volatility, which has potential to lower the value of existing bonds. This refunding of the bonds leads to costly refinancing for the parent firms, which has long-term implications. I find significantly negative cumulative abnormal returns at the issue date of the ERC bonds for these firms due to potential managerial entrenchment and foregone transfer of wealth from bondholders to stockholders. Consistent with the finance literature, I find significantly positive cumulative abnormal returns for parent firms at the announcement of the DBO. These positive short-term returns at the announcement do not translate into long-term positive returns. The common stock of these parent firms significantly underperforms the market over the periods three, four, and five years after the DBO date. This dichotomy can be attributed to the security market overreaction to the announcement of DBO. The long-term underperformance can be attributed to the costly refinancing of the ERC bonds.

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Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 83%

Section: Dbo and The Parent Firmmentioning

confidence: 99%

Section: Dbo and The Parent Firmmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

Tewari¹

2013

IBR

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Divisional sell‐off: A hazard function analysis

Ravenscraft¹,

Scherer²

1991

Manage Decis Econ

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For a sample of roughly 450 companies, hazard function estimation is used to determine the environmental and organizational variables precipitating the ‘sell‐off’ of divisional units. The sample focuses on 285 ‘lines of business’ fully divested between 1975 and 1981, comparing them to 2157 retained lines. The most powerful sell‐off predictor was prior profitability at the line of business level; the lower profits, the higher the sell‐off probability. Also, divestiture was more likely, the lower company‐wide profitability, the lower a line's market share, the lower the line's R&D/sales ratio, and in the aftermath of a company chief executive officer change. Units previously acquired in conglomerate mergers were more likely to be sold off than original units. On the buyer's side of the sell‐off market, large companies acquiring other firms' divested units tended to improve the units' profit performance, but not enough, on average, to realize a normal return on their investments.

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Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

Kaul

Nary

Singh

2018

Strategic Management Journal

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Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.

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Management Buyouts of Divisions and Shareholder Wealth

Cited by 66 publications

References 30 publications

Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

Divisional sell‐off: A hazard function analysis

Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

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