Predicting the Divestment of Prior Acquisitions
| Published date | 01 October 2022 |
| Author | Sina Amiri,David R. King,Samuel DeMarie,James R. Brown |
| Date | 01 October 2022 |
| DOI | http://doi.org/10.1111/1467-8551.12569 |
British Journal of Management, Vol. 33, 1803–1819 (2022)
DOI: 10.1111/1467-8551.12569
Predicting the Divestment of Prior
Acquisitions
Sina Amiri ,1David R. King,2Samuel DeMarie3and James R. Brown3
1J. Whitney Bunting College of Business, Georgia College & State University, Milledgeville, GA, 31061, USA,
2College of Business, Florida State University, Tallahassee, FL, 32306, USA, and 3College of Business, Iowa
State University, Ames, IA, 50011, USA
Corresponding author email: sina.amiri@gcsu.edu
We evaluate whether, in addition to seeking higher stock performance from acquisitions,
rm managers also seek predictable stock performance. Building on prior research, we
argue that higher volatility in a rm’s stock performance following an acquisition is as-
sociated with divestment of a prior acquisition. Survival analysis of a longitudinal, panel
dataset of 738 matched US acquisitions with 9,973 rm-year observations shows that
higher volatility in an acquiring rm’sstock performance, following an acquisition, signif-
icantly predicts divestment of a prior acquisition. This effect is independent and stronger
than the effect of the mean stock performance of an acquiring rm following an acquisi-
tion. We also nd moderating effects foracquisition relatedness and acquiring rm stock
performance after an acquisition. When an acquired unit is related to the parent rm’s
operations, it will be more likely to be divestedif subsequent stock performance displays
higher volatility. Still, higher overall stock performance makes a parent rm less likely
to divest an acquired unit, suggesting that larger mean returns override concerns about
higher stock performance volatility during corporate restructuring.
Introduction
Firms use both divestitures and acquisitions as
part of corporate restructuring (Barkema and
Schijven, 2008; Brauer, 2006; Capron, Mitchell
and Swaminathan, 2001; Dranikoff, Koller and
Schneider, 2002; Jas and Skelcher, 2005). While
distinct, acquisitions and divestments overlap. For
example,Weston (1989) reports that 35–45% of ac-
quisitions involve divestitures of former acquisi-
tions, and other studies identify a higher likelihood
of divestiture following an acquisition (e.g.Kaplan
and Weisbach,1992; Porter, 1987; Ravenscraft and
Scherer, 1987). Divestment of a prior acquisition
represents a strategic reversal of a signicant in-
vestment; however, there are relatively few studies
We appreciate feedback from Matthias Brauer, Katsu
Shimizu and Scott Johnson on earlier drafts of this
manuscript.
considering divestiture and acquisitions together,
and even less research on divestiture of prior ac-
quisitions.
This phenomenon deserves more attention
because acquisitions are complex strategic ac-
tions that absorb substantial rm resources and
time, and divestiture of prior acquisitions re-
verses prior strategic investment that can involve
substantial losses (Kaplan and Weisbach, 1992;
Shimizu, 2007). In addition, managers show
strong commitment to acquisitions (Haspes-
lagh and Jemison, 1991; Schweizer, 2005), and
divestment of acquisitions is associated with emo-
tional discomfort or embarrassment (Brauer and
Wiersema, 2012; Hayward and Shimizu, 2006;
Liu and McConnell, 2013). Still, divestment can
lead to better performance (Barkema and Schi-
jven, 2008; Dranikoff, Koller and Schneider, 2002;
Moliterno and Wiersema, 2007). Therefore, our
research question is: What inuences the decision
to divest a prior acquisition?
© 2021 British Academy of Management and Wiley Periodicals LLC. Published by JohnWiley & Sons Ltd, 9600 Gars-
ington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
1804 S. Amiri et al.
Existing research covers a variety of theoretical
perspectives to empirically investigate divestment
of prior acquisitions, including agency theory
(Shimizu and Hitt, 2005), prospect theory (Hay-
ward and Shimizu, 2006; Shimizu, 2007), resource
dependence theory (Xia and Li, 2013) and learning
theory (Meschi and Métais, 2015). Additionally,
multiple predictors of divestment have been in-
vestigated, including acquisition (Meschi and
Métais, 2015) or divestment (Humphery-Jenner,
Powell and Zhang, 2019; Thywissen, Pidun and
zu Knyphausen-Aufseß, 2018) experience, pres-
ence of blockholders (Bergh and Sharp, 2015;
Bergh et al., 2020), attractiveness to potential
buyers after the acquisition (Weston, 1989), re-
latedness (Bergh, 1997), rm performance (Vidal
and Mitchell, 2015), scope reduction (Kaul, 2012)
and unit power (Xia and Li, 2013). While man-
agement research recognizes that rms actively
restructure their portfolio of businesses through
acquisitions and divestitures to improve perfor-
mance (Barkema and Schijven, 2008; Dranikoff,
Koller and Schneider, 2002; Schönhaar, Pidun
and Nippa, 2014), there is a recognized need to
consider divestments as part of a rm’s portfolio
strategy (Shepherd, Williams and Patzelt, 2015).
While portfolio theory suggests that diversica-
tion helps to improvethe security of returns by sta-
bilizing volatility (Markowitz, 1952, 1959), the vast
majority of research predicting divestment has
focused on nancial performance (e.g. Shimizu,
2007; Shimizu and Hitt, 2005; Vidal and Mitchell,
2015) at the expense of performance volatility.
Markowitz (1952, 1959) outlines that wealth
creation depends on maximizing performance
(mean return) and minimizing volatility of perfor-
mance. While acquisitions can achievemore stable
stock performance (Devers et al., 2013; Markides,
1995), a motive for divestments to reduce stock
performance volatility has not been previously
investigated. We submit that portfolio theory
better captures different motivations for corporate
restructuring, as risk can be managed through
diversication of rm operations (Wright et al.,
2002). We maintain that investigating stock per-
formance volatility improves our understanding
of the divestment of former acquisitions, and
we nd prior acquisitions are more likely to be
divested when followed by higher stock perfor-
mance volatility. Still, we nd that a relationship
between higher stock performance volatility and
divestment of a prior acquisition is mitigated by
higher mean stock performance, and it is intensi-
edwhenanacquisitionisrelatedorinasimilar
industry. Related acquisitions, involving a target
rm in the same or similar industry, would not
be expected to change volatility in an acquiring
rm’s stock performance, as returns of related
businesses are correlated. When related acquisi-
tions are associated with increased volatility in
a rm’s stock performance, this will be counter
to expectations and the interests of managers in
a rm, contributing to the divestment of a prior
acquisition.
We contribute to the research in multiple ways.
Primarily, we apply portfolio theory to exam-
ine the impact of increased stock performance
volatility following an acquisition on predicting
subsequent divestment of that acquired unit.
This extends prior work that largely examines
the level of nancial performance of acquired
units in explaining divestment (e.g. Hayward and
Shimizu, 2006; Shimizu, 2007). We hand-collect
information from multiple databases and press
news to compile a unique set of longitudinal panel
data composed of divested prior acquisitions
matched with non-divested acquisitions, resulting
in 6,973 rm-year observations that allow examin-
ing acquisitions and divestments together.We also
examine two moderators of the likelihood that a
rm will divest a prior acquisition: (1) rm stock
performance and (2) relatedness of an acquisition.
Higher stock performance appears to counterbal-
ance divestment of acquisitions after an increase
in stock performance volatility, suggesting that
rms are willing to accept higher volatility when
accompanied by greater returns. In considering
relatedness, when stock performance volatility in-
creases, we nd that related acquisitions are more
likely to be divested. This nding is consistent
with the assumption that a diversied portfolio of
businesses will smooth out performance uctua-
tions. Thus,r ms will seek to be less dependent on
highly related business sectors. Overall, our results
suggest that managers attempt to both maximize
stock performance and minimize its volatility in
making divestment decisions.
Theoretical background
Corporate strategy suggests that managers con-
stantly re-evaluate their portfolio of businesses
and restructure it by adding and subtracting
© 2021 British Academy of Management and Wiley Periodicals LLC.
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