The value creation, motives and drivers of divestitures: An event and case study of Danish sell-off

Lea Krag Fogh

Student thesis: Master thesis


The intent of this thesis was to examine the use of, the motives behind and the value creation of Danish divestitures, more specific the sell-off phenomenon. Theory and research claimed that sell-offs has a positive announcement effect on shareholder wealth. The thesis studied a sample of Danish sell-offs carried out in the time period from 2002 until April 2009. In line with theory, an event study of the sample showed an average abnormal return on the day of the announcement of 1.29%, however the result is not statistical significant. The size of the abnormal return is in line with several similar event studies on the sell-off phenomenon carried out on samples of American sell-offs. Unexpected the study showed a negative cumulative average abnormal return in the period post the announcement of -1.96%, indicating that the positive effect on the announcement day vanished during the 30 day period post the announcement. An examination of theoretical and practical motives leading companies to divest showed that a wide number of drivers exist. Most drivers are rational motives, driven by a shareholder profit maximizing behavior. These drivers appear to be both strategic and financial motives. The strategic motives are often related to a change in strategy or a misfit between existing divisions in the company. The financial motives are often driven by poor performance in the company and the external pressure related to this. Divestment of a poor performing division can be an option to cut financial losses or raise capital for investment in other parts of the business. The examination of drivers also showed that management incentives can play an important role in the divestment decision, research argues that management could be reluctant to divest either due to personal financial incentives or due to possible negative reputational effects from the announcement of the divestment. Three minor case studies examined the value creation and the underlying drivers behind three of the Danish sell-offs taken from the sample in the event study. The case studies analyzed Danisco's sale of its Flavours division, Brdr. Hartmann's sale of its activities in South America and Dalhoff Larsen & Horneman's sale of its Building Materials Division. The case studies showed that a number of motives have been in play in the decision making of divesting a business unit, and that the motives are related to case specific conditions. All of the three sell-off cases had some degree of both strategic and financial motives driving the divestment decision. Danisco's sale of the Flavours division was a combination of the division's inability to meet financial targets and a contact with Firmenich that led to an option to sell at a good price. The investors assessed that the sale was a strategic good option and was positively surprised by the sales price, why that valuation effect of the announcement gave a CAR of 5.95% over the two day period (-1,0). In the case of Hartmann the main driver was poor financial performance, the company had realized an extensive loss on the activities and several years of turnaround plans had not changed the situation. The market reaction to the sale was twofold, on one hand the sale was an end on the poor performance in the region on the other hand the sales price was lower than expected, which resulted in an AR of -1.49% on the announcement day. The case of DLH showed a sale that was driven by a new focus strategy that intended to increase profitability, such that the company could repay earlier invested capital. The market assessed the sale as an option to leave a down turning market and found the sales price extremely good. The AR on the announcement day was 20.83% reflecting the strategic price Saint-Gobain was willing to pay. This thesis has shown that Danish sell-offs has been slightly value creating for shareholders on the announcement day, but that this value tends to vanish in the period post the announcement. The main motives behind the sell-offs are a mix of strategic and financial drivers, that make the divestment an optimal solution for the divesting company. The study has also shown that the main driver behind the divestment is not efficiency or identification of another optimal owner, it is internal strategy or financial conditions that drive the analyzed Danish sell-offs.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2009
Number of pages97