Strategic Management Journal

Strat. Mgmt. J., 35: 914925 (2014)

Published online EarlyView 28 May 2013 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2120
Received 25 March 2012 ; Final revision received 1 February 2013

RESEARCH NOTES AND COMMENTARIES

PERFORMANCE OF ACQUIRERS OF DIVESTED
ASSETS: EVIDENCE FROM THE U.S. SOFTWARE
INDUSTRY
TOMI LAAMANEN,1* MATTHIAS BRAUER,2 and OLLI JUNNA3
1
2
3

Institute of Management, University of St. Gallen, St. Gallen, Switzerland

Faculty of Law, Economics and Finance, Universite de Luxembourg, Luxembourg
UPM-Kymmene Corporation, Helsinki, Finland

We provide a comparative analysis of acquirer returns in acquisitions of public firms, private

firms, and divested assets. On the basis of a sample of 5,079 acquisitions by U.S. software
industry companies during 19882008, we find that acquisitions of divested assets outperform
acquisitions of privately held firms, which in turn outperform acquisitions of publicly held
firms. While the higher returns for acquisitions of divested assets relative to stand-alone
acquisition targets can be explained by market efficiency arguments, seller distress and improved
asset fit further enhance the positive returns of acquirers of divested assets consistent with
the relative bargaining power explanation. Finally, we find that the effects of these buyer
bargaining advantages are mutually strengthening and that they also hold for longer-term
acquirer performance Copyright 2013 John Wiley & Sons, Ltd.

INTRODUCTION
During recent years, asset sell-offs have become
increasingly common as the means for companies
to reorganize their business portfolios. Despite
this increasing activity, however, most of the
research on asset sell-offs has tended to focus
on the implications for the seller (see, e.g., Lee
and Madhavan, 2010), leaving a major gap in
our understanding of what are the consequences
for the acquirer (Maksimovic and Phillips, 2001:
2019). Acquisition research, on the other hand,
has focused almost exclusively on acquisitions
Keywords: acquisitions; divestitures; performance; software
*Correspondence to: Tomi Laamanen, Institute of Management, University of St. Gallen, Dufourstrasse 40a, CH-9000
St. Gallen, Switzerland. E-mail: Tomi.Laamanen@unisg.ch or
Tomi.Laamanen@tkk.fi

Copyright 2013 John Wiley & Sons, Ltd.

of stand-alone targets (see, e.g., Haleblian et al.,

2009; King et al., 2004, for a review). Asset
sell-offs differ, however, in an important aspect
from acquisitions of stand-alone firms (Clubb and
Stouraitis, 2002). In contrast to acquisitions of
stand-alone firms, they involve the absorption of
segments, units, or groups of tangible or intangible
assets rather than the full acquisition of a complete
entity (Clubb and Stouraitis, 2002).
We extend the existing research by providing a
comparative analysis of the performance of acquisitions of publicly held firms, privately held firms,
and divested assets. On the basis of a sample of
5,079 acquisitions by U.S. software industry companies during 19882008, we find that acquisitions
of divested assets outperform acquisitions of privately held firms, which in turn outperform acquisitions of publicly held firms. These differences in
performance can be explained by market efficiency

Research Notes and Commentaries

arguments. In addition, we examine whether the
relative bargaining positions of the buying and
selling firms affect acquirer performance in acquisitions of divested assets. We focus on two sources
of bargaining advantage specific to acquisitions of
divested assets: improved asset fit and seller distress. We find that these bargaining advantages are
also positively related to acquirer returns in acquisitions of divested assets. However, rather than
being the cause of the good baseline performance
in acquisitions of divested assets, these specific
bargaining advantages add to it, providing a basis
for even higher returns for acquirers of divested
assets.

HYPOTHESES
Strategic management researchers have been preoccupied for decades with the question of acquisition performance (e.g., Datta et al., 1992; King
et al., 2004). This research interest has resulted
in an extensive body of accumulated knowledge,
but there is still also a great amount of conflicting evidence regarding the factors associated with
acquisition performance (see, e.g., Haleblian et al.,
2009). One of the dominant explanations for value
destruction in acquisitions is that acquirers tend
to overpay (Hayward and Hambrick, 1997; Morck
et al., 1990; Sirower, 1997). According to the efficient market hypothesis, there is a tendency for a
competitive bidding process to drive the prices of
stand-alone public acquisition targets up to a point
where they only yield a marginal rate of return
to the acquirer (e.g., Barney, 1988; Varaiya, 1988;
Varaiya and Ferris, 1987). It is argued that this
effect, which is described as the winners curse,
results in zero or negative returns for acquirer
shareholders (King et al., 2004).
Prior research has also shown, however, that
the winners curse may not be equally generalizable across all types of acquisitions. Specifically,
studies have shown that privately held firms tend
on average to be purchased at a discount compared to publicly traded firms (Koeplin, Sarin,
and Shapiro, 2000; Silber, 1991). For example,
Koeplin et al. (2000) found that privately held
firms were acquired at a 20%40% discount compared to comparable public firms.
There are several potential reasons for the private firm discount (Capron and Shen, 2007). The
market for privately held firms can be regarded
Copyright 2013 John Wiley & Sons, Ltd.

915

as being less liquid (Silber, 1991) and thus less

perfectly competitive than the market for publicly
held firms (Barney, 1988). There are also differences in the availability of information between
public and private firms (Ragozzino and Reuer,
2007, 2009) that may force the private sellers
to provide higher discounts to increase the marketability of their firms (Capron and Shen, 2007).
Acquisitions of divested assets also feature a
number of traits that suggest that the winners
curse effect is likely to be less pronounced.
While prior research has recognized the difference
between public stand-alone and private standalone acquisitions in terms of market efficiency,
it has tended to bundle acquisitions of private
firms and acquisitions of divested assets together.
The market for divested assets, however, can
be regarded as being even less liquid and less
competitive than the market for private firms.
Compared to public and private firms, which can
be approached at any time with a proposal for an
acquisition by prospective acquirers, in divestitures
the seller first has to make it known that a
particular asset may be up for sale and indicate
that the asset is separable from the rest of the
organization.
While in some asset sell-off sales processes
greater publicity may partially restore market
efficiency, sellers have often been found to prefer
to set up private rather than public auctioning
sales processes (Datta et al., 2003). There are
a number of reasons for this. First, asset selloffs are frequently viewed as admissions of
past managerial mistakes (Markides and Singh,
1997). Second, the knowledge that a business
is for sale could affect its customers adversely,
weakening its attractiveness as an acquisition
target. Third, limiting the number of buyers
solicited for offers reduces the amount of time
and investment banking fees needed for finding
a sufficient pool of buyers and the amount of
time required by management to organize data
access and data rooms for the prospective acquirers
(Bruner, 2011).
Thus, we expect limited competition in the
acquisition process to be advantageous to the
acquirer. It reduces the likelihood of valuations
being inflated, increasing the probability of gains.
As a consequence, we predict that acquisitions of
divested assets will outperform not only acquisitions of publicly held firms, but also acquisitions
of privately held firms.
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

916

T. Laamanen, M. Brauer, and O. Junna

Hypothesis 1 (H1): Acquisitions of divested

assets are associated with greater stock market
returns than acquisitions of privately held and
publicly held stand-alone firms.
Specific bargaining advantages in acquisitions
of divested assets
While our baseline argumentation on the higher
returns for acquisitions of divested assets relative
to stand-alone firms is driven by market efficiency
arguments, we also expect the relative bargaining
positions of the acquirer and the seller to relate to
the performance for acquirers of divested assets.
In order to examine the extent to which bargaining
advantages contribute to acquirer returns in acquisitions of divested assets and explain potential
performance differences, we focus on two sources
of bargaining advantage specific to acquisitions of
divested assets: (1) gains resulting from improved
asset fit, and (2) gains resulting from seller
distress.
Improved asset fit
One of the critical factors influencing the stock
market returns of acquisitions of divested assets
is whether the acquirer can extract greater value
from the assets than the original parent (Goold
et al., 1998; John and Ofek, 1995; Vijh, 1999). An
acquirer is expected to extract higher synergistic
value from the assets for sale if the specific
assets are more closely related to the acquirers
operations than to the sellers operations (John and
Ofek, 1995; Lippman and Rumelt, 2003).
The challenge for an acquirer is that, although
greater asset relatedness is likely to enhance the
overall value creation, the effect could still be
bargained away by an effective seller that recognizes the synergy potential for the acquirer (Barney, 1988). Fortunately, greater asset relatedness
might also provide an acquirer with an information advantage in relation to the seller regarding
the value creation opportunities of the assets and
the future development of the industry (Coff, 2002;
Laamanen, 2007). As a result of this asymmetric information advantage, an acquirer could be
expected to have an advantage over the seller
in estimating the fair value of the assets being
divested and avoid overpayment. On the basis of
this logic of reasoning, we hypothesize:
Copyright 2013 John Wiley & Sons, Ltd.

Hypothesis 2 (H2): A higher level of relatedness

between the acquirer and the target compared
to the seller and the target is positively related
to acquirer returns in acquisitions of divested
assets.
Seller distress
In addition to improved asset fit, we also expect
the financial distress of the seller to affect its
bargaining position. Prior divestiture research has
found that firms that divest when in a strong
financial position achieve higher divestiture gains
compared to firms that divest in a state of
financial distress (e.g., Lee and Madhavan, 2010).
Financially constrained sellers may be forced to
conduct fire sales at significant discounts from
the asset value in order to raise the liquidity
needed to cover upcoming debt payments (Asquith
et al., 1994; Pulvino, 1998; Shleifer and Vishny,
1992). Thus, the bargaining power of a financially
constrained seller is significantly lower compared
to that of a proactive seller that is not financially
constrained (Brau et al., 2003; Sicherman and
Pettway, 1992). Therefore, we argue that an
acquirer is in a better position to define the
major terms and conditions of the acquisition when
acquiring from a financially distressed seller. We
put forward our third hypothesis accordingly:
Hypothesis 3 (H3): The financial distress of
the selling parent firm prior to the divestiture
is positively related to acquirer returns in
acquisitions of divested assets.
Finally, we argue that the effects of the two
bargaining levers are additive. They address different value creation components in acquisitions
of divested assets. An improved asset fit provides
potential for value creation for the buyer due to a
more synergistic use of the assets, and the financial distress of the seller provides for it a stronger
bargaining position when compared to financially
healthier sellers. While both of these levers can
be argued to be independently related to higher
returns to acquirers (H2 and H3), the existence of
a higher buyer bargaining power enables the buyer
not only to bargain a good deal on the stand-alone
value of the assets, but also on the additional value
creation potential of the improved asset fit. Thus,
we hypothesize:
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

Research Notes and Commentaries

Hypothesis 4 (H4): The joint effect of improved
asset fit and seller distress leads to greater
acquirer returns in acquisitions of divested
assets than the effects of the two independently.

METHODS

917

trading days (one year), measured from 295 to

45 days before each event. The market portfolio
is represented by the NASDAQ Composite Index.
This index was chosen since all the firms under
study are high-tech software companies. As such,
their share price correlates most strongly with the
NASDAQ index, and thus this index best explains
changes in market value.

Sample and data collection

Our sample consists of 5,079 acquisitions by publicly listed U.S.-based companies operating in the
software industry in the time period from January 1988 to January 2009. We chose the software
industry because it constitutes one of the most
active industries in terms of acquisition activity.
Moreover, the software industry is one of the most
important contributors to the U.S. economy, providing for both social and economic relevance. We
only included firms in our sample whose threedigit primary standard industry classification (SIC)
code was 737, comprising computer programming,
data processing, and other computer-related services.
We extracted the acquisition data from the
Thomson SDC database. Announcement dates
reported in Thomson SDC were cross-checked
through the use of Reuters Business Briefs and
LexisNexis. Moreover, using the Thomson SDC
and First Order databases, we identified confounding events during our event window period. Specifically, we identified announcements about earnings, dividend payouts, alliances, divestitures, and
changes of CEO with the help of these databases
and eliminated acquisition events if they took place
in the event window.
Measures
Acquirer cumulative abnormal returns (CAR)
Consistent with prior research on the performance
implications of acquisitions (see Haleblian et al.,
2009, for a discussion), this study applies an event
study methodology to measure the abnormal stock
market returns associated with a firms divestiture
announcement. The abnormal return represents
the cumulative difference between a companys
observed return and its expected return, during
a specific period surrounding the date of the
firms divestiture announcement. Following prior
research (e.g., Hayward, 2002; McNamara et al.,
2008), we defined the estimation window as 250
Copyright 2013 John Wiley & Sons, Ltd.

Acquisition of divested assets

The divesture flag in the SDC Platinum database
allows distinctions to be drawn between acquisitions of divested assets and stand-alone firms. On
the basis of the information provided by the SDC
Platinum database, acquisitions of divested assets
were assigned a value of 1. Accordingly, a value
of 0 was used to denote acquisitions of standalone firms. Following this procedure, 1,023 out
of a total of 5,079 transactions were classified as
acquisitions of divested assets.
Increase in asset relatedness
To determine the increase in asset relatedness, we
drew on the approach taken by Haleblian and
Finkelstein (1999). First, we calculated separate
scores for acquirer-to-target and seller-to-target
relatedness by assigning 6, 4, or 2 points based on
the 4-, 3-, and 2-digit primary SIC codes, respectively. For secondary SIC codes, the points allocated were scaled down to half. The final similarity
score was then defined as the maximum value
of the point allocation. Second, we subtracted
the seller-to-target relatedness scores from the
acquirer-to-target relatedness scores. This resulted
in a final score ranging between -6 and 6, with a
positive score denoting an increase in asset relatedness. For robustness purposes, we also ran our
analyses with a dichotomous operationalization.
Seller distress
We measured seller distress by a firms debt-tototal assets ratio. Debt ratios are common measures that have been used, for example, in predicting bankruptcies (e.g., Altman, 1968; Aziz
et al., 1988; Daily, 1994) and as signals of financial distress (e.g., Gilson and Vetsuypens, 1993;
Opler and Titman, 1994). To deal with the skewness of the measure, we used quartiles to distinguish the sellers most affected by their leverage.
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

918

T. Laamanen, M. Brauer, and O. Junna

As a robustness test, we also used Bruton, Oviatt,

and Whites (1994) measure of financial distress,
according to which a firm is distressed if both its
net income and return on invested capital have
declined during two consecutive years before the
focal year.
Increase in asset relatedness and seller distress
To test whether transactions in which a high
increase in asset fit and substantial seller distress
coincide perform significantly better than deals in
which only one of these conditions is given, we
created a dummy variable, which takes the value
of 1 if the increase in asset relatedness and the
degree of seller distress are both in the top quartile,
and 0 otherwise.
Control variables
We control for multiple factors that have been
found to affect acquisition performance in prior
research. From the acquirer characteristics, we
control for (1) Acquirer size, which we measured
by the log of an acquirers total assets; (2)
Acquirer diversification, which we proxied by
the number of different SIC code industries
where the acquiring firm operates; (3) Acquisition
experience, which we proxied by the number of
acquisitions carried out by the acquirer during
the three years prior to the focal acquisition,
and (4) Acquirer-to-target similarity, which we
determined using the established SIC code-based
measure of Haleblian and Finkelstein (1999). From
the deal characteristics, we control for (1) Foreign
bid , with a dummy variable where 1 corresponds
to the acquisition of non-U.S. assets and 0 to the
acquisition of U.S. assets; (2) Method of payment,
which we set to 1 for cash deals and 0 for share
deals or a combination of cash and a share deals;
(3) Deal price disclosure, which we set to 1 if the
price of the deal was disclosed and 0 otherwise;
and (4) Year trend , with which we account for
differences in industry deal activity over time.

RESULTS
We performed cumulative abnormal return analyses for each acquisition using multiple regression
analysis. Since an acquirers decision to undertake an acquisition of divested assets may not be
Copyright 2013 John Wiley & Sons, Ltd.

random, we applied Heckman two-stage regression analyses based on Heckmans two-step consistent estimator (Heckman, 1979). Using a firststage multinomial logistic model, we estimated
an acquirers propensity to conduct an acquisition of divested assets. In the second stage of
the Heckman procedure, we estimated abnormal
acquirer returns, including the inverse Mills ratio
() obtained from the first-stage selection model as
a control variable in the main regressions (Heckman, 1979). Incorporating the inverse Mills ratio
as a control enabled us to test for the presence of
endogeneity biases and to remove them so as to
obtain unbiased estimates. In addition, we ran all
our models with Whites heteroskedasticity robust
estimates.
The descriptive statistics and correlations of
the variables that we used in the analysis of
stock market returns at the time of the acquisition
announcement are shown in Table 1. Of the 5,079
acquisitions for which abnormal returns could
be determined, 1,023 (20%) were acquisitions of
divested assets and 4,056 (80%) had a stand-alone
firm as the acquisition target.
Table 2 displays the cumulative abnormal
returns by acquisition type. Mean difference
tests show that the returns for acquisitions
of private firms (CAR(2, +2) = 0.02%) are statistically significantly higher (p < 0.001) than
the returns for acquisitions of public firms
(CAR(2, +2) = 2.4%). In line with our first
hypothesis regarding higher returns for acquisitions of divested assets when compared to
stand-alone acquisitions, we find that the returns
from acquisitions of divested assets are positive
(CAR(2, +2) = 0.8%) and statistically significantly
higher than the returns from stand-alone acquisitions (p < 0.05) in general, and are also positive and statistically significantly higher than the
returns for acquisitions of private firms (p < 0.05).
Table 3 provides the results of our regression analysis with the acquirer cumulative abnormal returns
as our dependent variable.
Model 1 introduces the controls. Model 2 tests
whether acquisitions of private firms generate
greater returns than acquisitions of public firms.
Consistent with prior research (Capron and Shen,
2007), the private stand-alone acquisition dummy
in Model 2 is positive and statistically significant
(p < 0.001), indicating a more positive market
response to acquisitions of private firms relative
to acquisitions of public firms. Model 3 tests for
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

Copyright 2013 John Wiley & Sons, Ltd.

4.10
0.20
0.16
0.58

12.70
3.63
5.44

1.21
2.55
0.02

0.02
0.36
0.01
0.09
0.04
0.06
0.04
0.08
0.15
0.23

2.20 0.05
2.20
0.00
7.81 0.03
1.96 0.04
0.40 0.01
0.36
0.02
0.49
0.01

1
0.53
0.18

0.00
0.13
0.03

2.46
1.12
0.14

0.10
1
0.32 0.09
0.46
0.03
0.40
0.04

S.D.

N = 5,079. Correlations greater than 0.05 are significant at p < 0.05.

11.
12.
13.
14.

8.
9.
10.

5.
6.
7.

0.001
0.12
0.68
0.20

1.
2.
3.
4.

Acquirer CAR
Public target acquisition
Private target acquisition
Acquisition of divested
assets
Increase in asset relatedness
Seller distress
Increase in asset relatedness
& seller distress
Acquirer size
Acquirer diversification
General acquisition
experience
Acquirer-target-similarity
Foreign bid
Method of payment
Deal price disclosure

Mean

Descriptive statistics and correlations

Variables

Table 1.

0.02
0.02
0.18
0.13

0.07
0.02
0.03

0.37
0.07
0.22

1
0.74

1
0.23
0.27

0.06
0.05
0.09
0.03

0.01
0.08
0.01

1
0.52

0.51 0.17
0.04
0.13
0.09 0.14
0.03 0.17

0.01
0.06
0.01 0.01
0.02
0.02

0.41
0.37
0.26

1
0.52
0.67

1
0.5

10

0.02
0.04 0.04
0.02
0.02
0.08
0.03
0.06
0.02
0.11
0.00 0.01
0.02 0.23 0.17 0.22

0.04
0.04
0.02

1
0.00
0.06
0.04

11

1
0.01
0.06

12

1
0.37

13

Research Notes and Commentaries

919

Strat. Mgmt. J., 35: 914925 (2014)

DOI: 10.1002/smj

920

T. Laamanen, M. Brauer, and O. Junna

Table 2.

Cumulative abnormal returns by acquisition type and mean differences

Acquisition type
No. of observations
Mean CAR

Stand-alone
acquisitions
4,056
0.10%

Mean difference

Public stand-alone
acquisitions

Private stand-alone
acquisitions

Acquisitions of
divested assets

584
3,472
1,023
2.40%
0.02%
0.80%
Private vs. public stand-alone acquisitions
5.98***
Acquisitions of divested assets vs. stand-alone acquisitions
2.69**
Acquisitions of divested assets vs. private stand-alone acquisitions
1.80**

***p < 0.01; **p < 0.05 (t-tests).

differences between stand-alone acquisitions and

acquisitions of divested assets. The acquisition of
divested assets dummy in Model 3 is found to
be statistically significant and positive (p < 0.05).
These results provide support for H1. Model
4 lends further support for H1. When testing
whether acquisitions of divested assets generate
more positive returns than stand-alone acquisitions of private targets, the coefficient of the
acquisition of divested assets dummy continues to
be positive and statistically significant (p < 0.1).
Model 5 provides a test of H2, according to
which an increase in asset relatedness between
the acquirer and the purchased assets compared to
the seller of the assets is positively related to the
performance of the acquirer of the divested assets.
This model includes only acquisitions of divested
assets (N = 1,023) because an increase in asset
relatedness is not meaningful in connection with
stand-alone acquisitions and is thus a variable
specific to acquisitions of divested assets. The
coefficient for increase in asset relatedness is positive and statistically significant (p < 0.05), lending
support for H2. Moreover, mean difference
tests suggest that acquisitions of divested assets
with greatly improved asset fit generate returns
(CAR = 1.1%) that are significantly greater than
the returns for average acquisitions of divested
assets (CAR = 0.8%). Model 6 provides a test of
H3, according to which the financial distress of the
seller prior to divestiture is positively related to
the market returns for the acquirer of the divested
assets. The number of observations drops to 451
as a result of the absence of data on financial
leverage for sellers that are privately held. The
coefficient is positive and statistically marginally
significant (p < 0.1), indicating that financial
distress would indeed seem to weaken sellers
Copyright 2013 John Wiley & Sons, Ltd.

bargaining power. Additionally, the mean returns

for acquisitions of divested assets with seller distress (CAR = 1.8%) are found to be significantly
higher than for ordinary acquisitions of divested
assets (CAR = 0.8%). Model 7 provides a test of
H4, in which we predicted that the co-occurrence
of increased asset relatedness and seller distress
lead to a positive compound effect above the individual effects. Consistent with our prediction, this
effect is also positive and statistically significant
(p < 0.10). This result is further supported by
mean difference tests, indicating that acquisitions
of divested assets with large improvements in
asset fit and high levels of seller distress generate
returns (CAR = 2.5%) that are significantly higher
than for ordinary acquisitions of divested assets
(CAR = 0.8%).
Robustness test: Longer-term acquirer
performance
Because of the recent criticisms regarding the use
of cumulative abnormal returns as a measure of
performance (e.g., Oler et al., 2008; Zollo and
Meier, 2008), we complement our analyses with
a panel analysis to examine longer-term acquirer
performance. Specifically, for the panel analysis
we determined for each firm the percentage share
of divestiture acquisitions relative to the firms
total number of acquisitions within a three-year
time period. All of the control variables were
also aggregated on a three-year basis and are also
percentage scores (i.e., percentage of competed
bids, percentage of transactions paid in cash,
etc.). To determine the impact on the longer-term
performance of the firm, we measured the average
change in market value for the acquirer in the
three-year postacquisition period adjusted by the
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

CAR regression results

Copyright 2013 John Wiley & Sons, Ltd.

Robust standard errors are in parentheses.

***p < 0.01; **p < 0.05; *p < 0.1 (two-tailed)

Acquisition of divested assets with

high increase in asset relatedness
and high seller distress
Observations
R2

Seller distress

Change in asset relatedness

Acquisition of divested assets

Explanatory variables
Private acquisition

Inverse Mills ratio ()

Year trend

Deal price disclosure

Method of payment

Foreign bid

Acquirer-target similarity

Acquirer experience

Acquirer diversification

Acquirer size

Constant

Variables

Table 3.

0.67
(0.68)
0.00***
(0.00)
0.002***
(0.00)
0.000
(0.00)
0.001
0.001
0.002
(0.00)
0.006
(0.01)
0.000
(0.01)
0.000
(0.00)
0.010
(0.02)

5,079
0.01***

0.60
(0.77)
0.00
(0.00)
0.002*
(0.00)
0.000
(0.00)
0.002**
0.002**
0.000
(0.00)
0.017
(0.01)
0.003
(0.01)
0.000
(0.00)
0.015
(0.03)

Control-only
model
Model 1

4,056
0.02***

0.03***
(0.01)

Returns for
private
acquisitions
vs. Returns for
public stand-alone
acquisitions
Model 2

5,079
0.01***

0.01**
(0.00)

0.70
(0.68)
0.00***
(0.00)
0.002***
(0.00)
0.000
(0.00)
0.001
0.001
0.002
(0.00)
0.006
(0.01)
0.000
(0.01)
0.000
(0.00)
0.008
(0.02)

Returns for
divestiture
acquisitions
vs. Returns for
stand-alone acquisitions
(private & public)
Model 3

4,495
0.01***

0.01*
(0.00)

0.61
(0.67)
0.00***
(0.00)
0.002**
(0.00)
0.000
(0.00)
0.002
0.002
0.002
(0.00)
0.002
(0.01)
0.005
(0.01)
0.000
(0.00)
0.001
(0.02)

Returns for
divestiture
acquisitions
vs. Returns for
private stand-alone
acquisitions
Model 4

1,023
0.02***

0.003**
(0.00)

2.58**
(1.03)
0.01***
(0.00)
0.002
(0.00)
0.000
(0.00)
0.002
0.002
0.010
(0.01)
0.004
(0.01)
0.002
(0.01)
0.001***
(0.00)
0.031
(0.02)

Returns for
divestiture
acquisitions
with increased
asset
relatedness
Model 5

451
0.02***

0.01*
(0.00)

2.36
(1.64)
0.01**
(0.00)
0.000
(0.00)
0.001
(0.00)
0.001
0.001
0.005
(0.01)
0.007
(0.01)
0.000
(0.01)
0.001
(0.00)
0.020
(0.02)

Returns for
divestiture
acquisitions
given seller
distress
Model 6

1,023
0.02***

0.023*
(0.00)

2.41**
(1.00)
0.01***
(0.00)
0.002
(0.00)
0.000
(0.00)
0.000
0.000
0.009
(0.01)
0.002
(0.01)
0.002
(0.01)
0.001**
(0.00)
0.030
(0.02)

Returns for
divestiture
acquisitions
given an increase
in asset relatedness
and seller distress
Model 7

Research Notes and Commentaries

921

Strat. Mgmt. J., 35: 914925 (2014)

DOI: 10.1002/smj

922

T. Laamanen, M. Brauer, and O. Junna

Table 4.

Fixed effects panel regression results

Variables

Model 1

Model 2

Model 3

Model 4

Model 5

Constant

27.98
(72.62)
0.26***
(0.09)
0.00
(0.08)
0.02
(0.02)
0.16
(0.38)
0.10
(0.51)
0.16
(0.33)
0.01
(0.04)

9.11
(80.30)
0.25**
(0.11)
0.00
(0.09)
0.00
(0.02)
0.16
(0.42)
0.54
(0.52)
0.32
(0.37)
0.01
(0.04)
0.19
(0.65)
1.07**
(0.38)

39.91
(72.08)
0.26***
(0.09)
0.02
(0.08)
0.02
(0.02)
0.33
(0.38)
0.19
(0.50)
0.11
(0.32)
0.02
(0.04)

29.27
(71.57)
0.27***
(0.09)
0.03
(0.08)
0.00
(0.02)
0.09
(0.39)
0.21
(0.50)
0.46
(0.34)
0.01
(0.04)

40.36
(71.88)
0.26***
(0.09)
0.04
(0.08)
0.02
(0.02)
0.36
(0.38)
0.32
(0.51)
0.09
(0.32)
0.02
(0.04)

29.01
(71.30)
0.28***
(0.09)
0.02
(0.08)
0.00
(0.02)
0.09
(0.39)
0.30
(0.50)
0.46
(0.34)
0.01
(0.04)

0.87***
(0.31)

1.06***
(0.32)
0.90***
(0.33)

0.61*
(0.35)

0.90***
(0.31)

Acquirer size
Acquirer-target similarity
General acquisition experience
Percentage of foreign bids (three years)
Percentage of cash deals (three years)
Percentage of acquisitions with price
disclosure (three years)
Year trend
Percentage of acquisitions of private
targets (three years)
Percentage of acquisitions of divested
assets (three years)
Percentage of acquisition of divested
assets with increased asset relatedness
Percentage of acquisitions of divested
assets with distressed seller
Percentage of acquisitions of divested
assets with co-occurrence of high
increase in asset relatedness and high
seller distress
Observations
R2

Model 6

1.42*
(0.81)
1.90***

435
0.06

379
0.09

435
0.08

435
0.09

435
0.08

(0.60)
435
0.10

***p < 0.01; **p < 0.05; *p < 0.1

market index (i.e., NASDAQ Composite Index)

and adjusted for dividend payments.
Table 4 provides the results of our fixed effects
panel regression analysis with the acquirers
longer-term (three years) change in market value as
the dependent variable. In all our Models 26, the
percentage of acquisitions of divested assets during
a three-year time period has a significantly positive effect on the acquirers market value change
in the subsequent three-year postacquisition time
period. Model 2 further suggests that the effect of
acquisitions of divested assets is greater than for
stand-alone acquisitions of private targets. Model 4
in the panel regression table provides a test of H2,
according to which an increase in asset relatedness between the acquirer and target compared
to the seller and target is positively related to
the performance of the acquirer of the divested
assets. The panel regressions results provide statistically significant support (p < 0.01) for this
Copyright 2013 John Wiley & Sons, Ltd.

hypothesis. Model 5 shows the results for H3 on

whether acquisitions of divested assets generate
higher returns if the seller is in financial distress.
We also find support for this prediction (p < 0.10).
Finally, Model 6 shows the positive, statistically
significant effect for the percentage of acquisitions
of divested assets in which an increase in asset
relatedness and seller distress coincide.

DISCUSSION AND CONCLUSION

This study provides a comparative analysis of
acquirer returns in acquisitions of public firms,
private firms, and divested assets. On the basis of
a sample of 5,079 acquisitions by U.S. software
industry companies during 19882008, we find
that acquisitions of divested assets outperform
acquisitions of privately held firms, which in
turn outperform acquisitions of publicly held
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

Research Notes and Commentaries

Figure 1.

Acquirer returns (CAR) from different types of acquisitions

firms. While the higher returns for acquisitions of

divested assets relative to stand-alone acquisitions
seem to be driven by market efficiency, we further
argue and find that improved asset fit and seller
distress further positively influence returns for
acquirers of divested assets. We find that these
bargaining advantages are additive and that they
also hold for longer-term acquirer performance.
Figure 1 summarizes our results by showing the
cumulative abnormal returns for the different types
of acquisitions and the additive effects of the
bargaining advantages.
By focusing on acquisitions of divested assets,
we add to the emerging research stream in the
acquisition literature, which has set out to identify subgroups of acquisitions resulting in positive returns for acquirers that previous research
has been unable to identify consistently (e.g.,
Capron and Shen, 2007; Uhlenbruck et al., 2006).
Our results suggest that acquisitions of divested
assets should be reckoned among such subgroups
generating above-average positive returns for the
acquirer, both in the short term as well as in the
longer term. Essentially, this consistency between
Copyright 2013 John Wiley & Sons, Ltd.

923

investors short-term reactions to acquisitions of

divested assets and the firms longer-term market
valuation indicates that such an acquisition strategy may not only be initially positively received
by investors but actually sustainably add to a firms
financial performance.
From a practical perspective, our results highlight the usefulness of a programmatic acquisition
strategy focused on the acquisition of divested
assets. While we have seen the potential benefits
that derive from specializing in acquisitions of
divested assets in the private equity industry, our
results suggest that industrial firms may benefit
equally from a systematic approach to buying other
firms asset disposals. Devising this kind of acquisition strategy could be expected to be particularly
useful during times of economic downturn, when
many firms are looking for ways to restructure
their businesses.
Our findings also provide several directions for
future research. Prior research suggested that significant improvements in profit returns in the posttakeover period of hostile takeovers are associated
with significant asset divestitures (Cosh and Guest,
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

924

T. Laamanen, M. Brauer, and O. Junna

2001). To explore the context-sensitivity of our

studys findings, it would thus be interesting to
analyze the returns for acquirers of divested assets
in the aftermath of hostile takeovers to see whether
these returns are similar to the ones observed in
our study. Moreover, recognizing the potential for
further advancing our understanding of acquisition performance, we call for more research that
would make even more finely grained distinctions
between different acquisition types (Capron and
Shen, 2007; Ragozzino and Reuer, 2007, 2009,
2011). In addition to going deeper into the bargaining dynamics associated with asset sell-offs,
further distinctions could be made in terms of the
type of divesting firm (e.g., public vs. private firm)
and the type of acquiring firm (e.g., public vs. private acquirer). Specifically, a comparative analysis
of the returns to financial acquirers (e.g., private
equity) and to strategic acquirers could contribute
to a deeper understanding of acquisition performance.

ACKNOWLEDGEMENTS
We thank coeditor Will Mitchell and two
anonymous reviewers for their constructive and
insightful comments that significantly improved
this paper. We are also grateful to Margarethe
Wiersema and Olivier Bertrand for comments on
earlier versions of this paper.

REFERENCES
Altman EI. 1968. Financial ratios, discriminant analysis
and the prediction of corporate bankruptcy. Journal of
Finance 13(4): 589609.
Asquith P, Gertner R, Scherfstein D. 1994. Anatomy
of financial distress: an examination of junk bonds
issuers. Quarterly Journal of Economics 109(3): 625.
Aziz A, Emanuel DC, Lawson GH. 1988. Bankruptcy
predictionan investigation of cash flow based models. Journal of Management Studies 25(5): 419437.
Barney JB. 1988. Returns to bidding firms in mergers and
acquisitionsreconsidering the relatedness hypothesis. Strategic Management Journal 9: 7178.
Brau J, Francis B, Kohers N. 2003. The choice of
IPO versus takeover: empirical evidence. Journal of
Business 76(4): 583612.
Bruner RF. 2011. Applied Mergers and Acquisitions
Workbook . Wiley: Hoboken, NJ.
Bruton GD, Oviatt BM, White MA. 1994. Performance
of acquisitions of distressed firms. Academy of Management Journal 37(4): 972989.
Copyright 2013 John Wiley & Sons, Ltd.

Capron L, Shen JC. 2007. Acquisitions of private vs.

public firms: private information, target selection, and
acquirer returns. Strategic Management Journal 28(9):
891911.
Clubb C, Stouraitis A. 2002. The significance of selloff profitability in explaining the market reaction
to divestiture announcements. Journal of Banking &
Finance 26(4): 671688.
Coff RW. 2002. Human capital, shared expertise, and
the likelihood of impasse in corporate acquisitions.
Journal of Management 28(1): 107128.
Cosh A, Guest P. 2001. The long-run performance
of hostile takeovers: UK evidence, ESRC Centre
for Business Research. Working Paper 215, Centre
for Business Research, University of Cambridge,
Cambridge, MA.
Daily CM. 1994. Bankruptcy in strategic studiespast
and promise. Journal of Management 20(2): 263295.
Datta S, Iskandar-Datta M, Raman K. 2003. Value creation in corporate asset sales: the role of managerial,
performance and lender monitoring. Journal of Banking & Finance 27(2): 351375.
Datta DK, Pinches GE, Narayanan VK. 1992. Factors influencing wealth creation from mergers and
acquisitionsa metaanalysis. Strategic Management
Journal 13(1): 6784.
Gilson SC, Vetsuypens MR. 1993. Ceo compensation
in financially distressed firmsan empirical-analysis.
Journal of Finance 48(2): 425458.
Goold M, Campbell A, Alexander M. 1998. Corporate
strategy and parenting theory. Long Range Planning
31(2): 308314.
Haleblian J, Devers CE, McNamara G, Carpenter MA,
Davison RB. 2009. Taking stock of what we know
about mergers and acquisitions: a review and research
agenda. Journal of Management 35(3): 469502.
Haleblian J, Finkelstein S. 1999. The influence of organizational acquisition experience on acquisition performance: a behavioral learning perspective. Administrative Science Quarterly 44(1): 2956.
Hayward MLA. 2002. When do firms learn from their
acquisition experience? Evidence from 19901995.
Strategic Management Journal 23(1): 2139.
Hayward MLA, Hambrick DC. 1997. Explaining the
premiums paid for large acquisitions: evidence of
CEO hubris. Administrative Science Quarterly 42(1):
103127.
Heckman J. 1979. Sample selectionbias as a specification
error. Econometrica 47(1): 153161.
John K, Ofek E. 1995. Asset sales and increase in focus.
Journal of Financial Economics 37(1): 105126.
King DR, Dalton DR, Daily CM, Covin JG. 2004. Metaanalyses of post-acquisition performance: indications
of unidentified moderators. Strategic Management
Journal 25(2): 187200.
Koeplin J, Sarin A, Shapiro AC. 2000. The private
company discount. Journal of Applied Corporate
Finance 12(4): 94101.
Laamanen T. 2007. On the role of acquisition premium
in acquisition research. Strategic Management Journal
28(13): 13591369.
Strat. Mgmt. J., 35: 914925 (2014)
DOI: 10.1002/smj

Research Notes and Commentaries

Lee D, Madhavan R. 2010. Divestiture and firm performance: a meta-analysis. Journal of Management
36(6): 13451371.
Lippman SA, Rumelt RP. 2003. A bargaining perspective
on resource advantage. Strategic Management Journal
24(11): 10691086.
Maksimovic V, Phillips G. 2001. The market for
corporate assets: who engages in mergers and asset
sales and are there efficiency gains? Journal of
Finance LVI(6): 20192065.
Markides C, Singh H. 1997. Corporate restructuring: a
symptom of poor governance or a solution to past
managerial mistakes? European Management Journal
15(3): 213219.
McNamara GM, Haleblian J, Dykes BJ. 2008. The performance implications of participating in an acquisition
wave: early mover advantages, bandwagon effects,
and the moderating influence of industry characteristics and acquirer tactics. Academy of Management
Journal 51(1): 113130.
Morck R, Shleifer A, Vishny R. 1990. Do managerial
objectives drive bad acquisitions? Journal of Finance
45: 3148.
Oler DK, Harrison JS, Allen MR. 2008. The danger of
misinterpreting short-window event study findings in
strategic management research: an empirical illustration using horizontal acquisitions. Strategic Organization 6(2): 151184.
Opler TC, Titman S. 1994. Financial distress and
corporate performance. Journal of Finance 49(3):
10151040.
Pulvino TC. 1998. Do asset fire sales exist? An empirical investigation of commercial aircraft transactions.
Journal of Finance 53(3): 939978.

Copyright 2013 John Wiley & Sons, Ltd.

925

Ragozzino R, Reuer JJ. 2007. Initial public offerings

and the acquisition of entrepreneurial firms. Strategic
Organization 5(2): 155176.
Ragozzino R, Reuer JJ. 2009. Contingent earnouts in
acquisitions of privately held targets. Journal of
Management 35(4): 857879.
Ragozzino R, Reuer JR. 2011. Geographic distance
and corporate acqusitions: signals from IPO firms.
Strategic Management Journal 32: 876894.
Shleifer A, Vishny R. 1992. Liquidation values and debt
capacity: a market equilibrium approach. Journal of
Finance 47: 13431366.
Sicherman NW, Pettway RH. 1992. Wealth effects
for buyers and sellers of the same divested assets.
Financial Management 21(4): 119128.
Silber WL. 1991. Discounts on restricted stock: the
impact of illiquidity on stock prices. Financial Analysts Journal 47(4): 6064.
Sirower ML. 1997. The Synergy Trap: How Companies
Lose the Acquisition Game. The Free Press: New York.
Uhlenbruck K, Hitt MA, Semadeni M. 2006. Market
value effects of acquisitions involving Internet firms: a
resource-based analysis. Strategic Management Journal 27(10): 899913.
Varaiya NP. 1988. The winners curse hypothesis and corporate takeovers. Managerial and Decision Economics
9: 209219.
Varaiya NP, Ferris KR. 1987. Overpaying in corporate
takeovers: the winners curse. Financial Analysts
Journal 9(43): 6470.
Vijh AM. 1999. Long-term returns from equity carveouts.
Journal of Financial Economics 51(2): 273308.
Zollo M, Meier D. 2008. What is M&A performance?
Academy of Management Perspectives 22(3): 5577.

Strat. Mgmt. J., 35: 914925 (2014)

DOI: 10.1002/smj

Copyright of Strategic Management Journal is the property of John Wiley & Sons, Inc. and its
content may not be copied or emailed to multiple sites or posted to a listserv without the
copyright holder's express written permission. However, users may print, download, or email
articles for individual use.