Bustup Takeovers of Value-Destroying Diversified Firms

Authors

  • PHILIP G. BERGER,

  • ELI OFEK

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    • Berger is from The Wharton School, University of Pennsylvania. Ofek is from Stern School of Business, New York University. We appreciate capable research assistance from Franco Wong and helpful comments from Andrew Alford, Brad Barber, Robert Comment, Bob Holthausen, Edi Hotchkiss, Henri Servaes, and participants at the NBER's Conference on Corporate Finance, the Western Finance Association meetings, the American Finance Association meetings, and workshops at New York University and the University of Pennsylvania. We are especially grateful for the many constructive comments of the anonymous referee. Berger acknowledges the financial support of Coopers & Lybrand.


ABSTRACT

We examine whether the value loss from diversification affects takeover and breakup probabilities. We estimate diversification's value effect by imputing stand-alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by LBO associations, which frequently break up their targets. For a subsample of large diversified targets: (1) higher value losses increase the extent of post-takeover bustup; and (2) post-takeover bustup generally results in divested divisions being operated as part of a focused, stand-alone firm.

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