MERGER ACTIVITY AND SALES OF SUBSIDIARIES BETWEEN COMPANY GROUPS
| Author | Stephen Lye,Aubrey Silbertson |
| DOI | http://doi.org/10.1111/j.1468-0084.1981.mp43003002.x |
| Date | 01 August 1981 |
| Published date | 01 August 1981 |
MERGER ACTIVITY AND SALES OF
SUBSIDIARIES BETWEEN COMPANY GROUPS
Stephen Lye and Aubrey Silbertson
I. INTRODUCTION
Merger activity in the l960s and l970s has attracted a great deal of
attention, giving rise to renewed discussion of what public policy
towards mergers should be (HMSO 1978). Far less attention has been
paid to 'de-merging', the process by which a company sells off part
of its business. The sale may be to an existing company, or to a new
company formed especially to acquire the relevant assets. Usually
the sale is of a subsidiary already registered as a company, but on
occasions a company may have to be specially incorporated in order
to facilitate a sale.
Penrose (1959) discusses the reasons why a firm may wish to sell
off parts of its existing business (pp. 176-80). She argues that, even
if the parts are profitable, alternative uses for the management effort
and funds involved may be even more profitable. If there are spare
management resources and easy access to funds, there will be no need
to sell off a profitable subsidiary in order to expand elsewhere. Such
limitations will often exist in practice, however, and there are therefore
always likely to be firms who want to withdraw from given lines of
activity in order to take advantage of new profit opportunities. A
market for separable activities of firms facilitates the correction of
'mistakes', and reduces the risk of loss when a firm wishes to experi-
ment with new lines of activity. Penrose argues that the reshuffling of
particular types of business can be presumed to increase efficiency,
although the competitive performance of industry may be reduced.
This last point is of course a reason for keeping a particularly wary
eye on cases of horizontal integration arising from mergers and de-
mergers.
Sales of subsidiaries can clearly be an important means of restructur-
ing industry. A large company may have a wide spread of interests,
at home and overseas, and may find difficulty in managing its various
interests effectively. This is especially likely to be the case at a time
when the main part of its business is in difficulties, or when some of
its subsidiaries are in fields far removed from its main business. The
latter situation may have arisen as a result of a merger, or series of
mergers, or simply from diversification at some previous period.
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While the large company may have problems in making a success of a
subsidiary, another company, with closer connections with its line of
business, might possibly be able to do better with it. Or a smaller com-
pany, set up for the purpose, may be able to concentrate attention on
the business of the former subsidiary, and hence improve its performance.
It has recently been argued by Nicholas Stacey, the Chairman of
Chesham Amalgamations, (who as a merger-broker has, of course, an
interest in the question) that although the pace of 'hive-offs' during
the twelve years up to 1981 has been steady, 'it would seem that in
general little progress has been accomplished in the encouragement
of selling off more subsidiaries by large or larger companies' (Chesham
Amalgamations (1981) p. 7). He attributes this not to a lack of would-
be purchasers, but rather to 'the stonewalling by large companies in
selling their subsidiaries. Sadly, most large companies' executives,
dissatisfied with the future prospects or current profit performance
of certain subsidiaries will dispose of them only in the last resort'.
Stacey thinks it would be particularly appropriate for such hiving-off
to take place at present, since opportunities for purchase by individual
entrepreneurs have recently been improved by the establishment of
capital development firms by many City financial institutions with
pension funds.
There have been press reports of increased interest in the possibility
of subsidiary companies being bought by their former managers,
often with the assistance of specialized agencies such as the Industrial
and Commerical Finance Corporation. Unfortunately, statistics on
sales of subsidiaries are not available, although figures are available
for acquisitions of subsidiary UK companies by other UK companies.
Obviously for an acquisition to take place a sale must occur, but
the available figures appear to exclude sales of subsidiaries other than
to previously existing companies. Although the published statistics
tell part of the story only, they are interesting nevertheless, since they
give an indication of the pace and direction of the transfer of sub-
sidiaries between existing companies. There has been little previous
work published on this subject, except by Chiplin and Wright (1980).
The present article attempts to analyse the data further, and in par-
ticular to look at how far transfers of subsidiaries have influenced
the homogeneity of divesting and acquiring firms. If transfers of sub-
sidiaries have corrected previous 'mismatches' between subsidiary and
parent companies, this gives hope of better future performance, both
by divesting companies (who will have lost an ugly duckling) and by the
subsidiaries that have been transferred. Indeed, the introduction of a
new subsidiary into a firm could have the effect of improving the per-
formance of the firm as a whole, partly through enabling economies of
scale to occur, and partly through benefits from an infusion of new
management.
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