Value Creation of Norwegian Divestments

Anna Synøve Haldar Holen & Maren Sunde Bratholm

Student thesis: Master thesis

Abstract

Traditionally, M&A has been considered an optimal approach to restructure a company, motivated by the aim to diversify and spread operational risk. Not all firms share the opinion that they might need to shrink their portfolio before creating growth opportunities. However, according to recent research, this trend is changing as divesting more proactively to fund growth has become a more frequently used strategy. Although there is consensus in the existing literature that divestments create shareholder value, limited research on this topic has been done on the Norwegian market. These arguments lead to the thesis’ central problem statement, posed as the following question: “What are the motives behind a divestiture, and is there empirical evidence of Norwegian divestments creating shareholder value?” The problem statement can be addressed by first investigating the motives behind the decisions to divest, followed by testing the value effect by the means of two empirical studies. The first study is an event study, investigating whether the announcement of multiple Norwegian divestments over the past decade created positive average abnormal returns (AAR) for the vendor companies. The result gave a statistically significant AAR of 2,5% on the announcement day, providing empirical evidence of divestitures creating value for Norwegian companies. To provide a deeper understanding of potential value effects, a case study was also conducted of the ongoing carve-out announced last year by the Norwegian fertilizer conglomerate Yara. The applied valuation found that each company generates a higher fair value combined than Yara as a consolidated company. In fact, the combined value was 8,5% higher than the market value of Yara, which indicates that the company is being traded at a conglomerate discount of 8,5%. While the case study is based on only one specific company which offers limited basis for scientific generalizations, the event study covers multiple divestments. Combining both studies provides a better basis for addressing the central question posed by this thesis. Based on both studies, one could therefore draw the conclusion that there is empirical evidence of divestments creating shareholder value for Norwegian companies. However, it is important to emphasize that these studies only cover a period of relatively robust market conditions. Therefore, conclusions based on the studies cannot be drawn as to whether divestments could create shareholder value in the Norwegian market during an economic downturn.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final ThesisMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages205