Asset divestitures

Julie Søgaard & Dinna Louise Sønderstrup Nielsen

Student thesis: Master thesis

Abstract

This thesis research what motivates companies to divest assets and how asset divestitures create shareholder value. To explore these concepts this thesis combines the knowledge of existing academic literature relating the motives behind asset divestitures and the shareholder value creation, with empirical studies in the form of case studies and an event study. Overall this thesis concludes that the main motive for divesting is to react on or correct factors which make the firm inefficient. Further, this thesis conclude that the motive behind asset divestments do influence how shareholder value is created, as the motive reveal how efficient or inefficient a firm is. The two case studies of; Danisco’s divestment of its Sugar division in 2008 and Dantherm’s divestment of its Filtration division in 2010, was conducted to explore what motivates firm to divest in practice. The findings illustrate that the motivation for divesting, were distinctly different in the two cases. However both cases demonstrate how divestitures are driven by multiple motives originating in strategy, finance and corporate governance. The case studies further illustrates that changes in the external environment has an effect on the motives for divesting as both Dantherm and Danisco were affected by respectively the financial crisis and political regulations. Overall this thesis finds strategic and financial motives to be directly related to the decision to divest, whereas corporate governance both can be seen as a driver and a motive it-self. Further it is found that the motives behind asset divestitures are related. The thesis further studies the causal relationship between the motives behind divestments and shareholder value through the use of the event study methodology. The findings imply that the stock markets initial reactions to divestitures announcements are positive. Second, through testing three hypotheses, we find that the motives behind divestitures and the market conditions under which firms operate, do affect the markets initial response to a divestiture announcement. We tested both the differences in the divesting firms’ financial conditions and the financial crisis influence on divestments. The findings imply that measuring the effect of a single event is very complex, as an asset divestment must be seen as a sequence of events and complex strategic actions. The value generation must therefore be integrated into the stock return over a period of time.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2011
Number of pages146