Shareholder Wealth Experience of Buyers in Corporate Divestitures: Impact of Business Strategy, Growth Opportunities and Bargaining Power

Whether corporate acquisitions create or destroy value for shareholders is still an unresolved issue. One type of corporate acquisition is made when another firm carries out a divestiture. Evidence on the wealth effects of such partial acquisitions is limited to a few US studies. This study examines the wealth experience of buyers in 877 UK corporate divestitures during 1987-93 and seeks to identify the factors determining the wealth gains. We focus on value created by the acquirer through its business strategy and by exploiting its growth opportunities and on value distributed from the seller to the buyer due to the relative bargaining power of the seller and the buyer. We find that buyers experience significant buy and hold abnormal returns of 0.48% over three days following the divestiture announcement. Thus in contrast to many full takeovers, partial acquisitions create value. We also report that buyers enjoy larger gains when they buy from financially healthy sellers and during recessions. Economic environment rather than firm-specific growth opportunities lead to higher returns. Materially larger purchases create more value. UK buyers buying UK divisions of the seller have an information advantage over UK purchasers of foreign divisions and experience larger wealth increases. The study highlights the importance of environmental, firm-specific and transactional characteristics in determining the value gains from partial acquisitions.