Value Creation Through Divestitures Spin-offs and Sell-offs

Jeyanevathan Jeyaratnam & Frederik Baandhøj Pontoppidan

Student thesis: Master thesis

Abstract

Divestitures are ways for companies to adjust their ownership structure and reduce its business portfolio scope, which can be done either through but are not limited to sell-offs and spin-offs. By doing so it is believed that the firm will exhibit positive corporate change. The study on value creation from divestitures has long been in the shadow of value creation from acquisitions, but has in recent years attracted more and more research from finance and economics scholars. As there is limited research on divestitures on the oil industry, the thesis wanted to extend the body of research by investigating the shareholder wealth effects achieved from divestitures, including sell-offs and spin-offs, and the underlying motives on the Western European and North American markets. The thesis conducts an extensive investigation in order to measure the short-term value effect of divestitures announcements on shareholders of the divesting firm. The investigation is conducted by applying an event study methodology, where the abnormal return on divestiture announcement has been measured. In order to determine the motives underlying divestitures, and more specifically sell-offs and spin-offs, parametric tests and single/multiple regression analyses are conducted. The sample data consists of 80 sell-off events and 53 spin-off events, giving a total of 133 divestiture events in the oil and gas industry from 1998-2017. The thesis reports that: (1) Divestiture announcements are value creating for shareholders. (2) Shareholders of firm’s divesting through sell-off do not earn significant returns, whereas shareholders of spin-off firms do. (3) The relative size of the divestitures appears to be related to higher shareholder returns. (4) When sell-off proceeds are used to repay debt or payout dividends the markets react negatively. (5) Spin-offs of none-core business units leads to positive announcement effects, however the effects are reduced when it is a foreign subsidiary. Focused sell-offs are perceived negative, and even more negative if it is a foreign subsidiary. (6) Divesting firms experience undervaluation the year prior to divestiture, however the information asymmetry between financial analysts and the firm is lowered in the year after the divestiture. (7) Operational efficiency increases for firms performing focused divestitures.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages125