Bustup Takeovers of Value-Destroying Diversified Firms

Abstract

We estimate the effect that value-destroying diversification has on the probabilities of takeover and break-up. Recent papers show that unrelated diversification decreased firm value, that the value loss is reversible, that bidder gains from takeovers are higher when their targets' managers have destroyed more value, and that break-ups and selloffs are a common result of takeovers. Considering these findings together leads us to hypothesize that as the amount of value destroyed by a firm's diversification strategy increases, so does its probability of being taken over and broken up. We find that the value loss from diversification is related to the probabilities of future takeover and of break-up. We show that LBOs are more likely than other acquirers to target value-destroying diversified targets. Finally, for a subsample of large diversified targets, half are broken-up after they are acquired, and the mean value effect of diversification is -22% to -33% for these firms. In contrast, the half not broken-up after takeover have a mean valuation effect from diversification of -3% to 6%.

JEL Classification: G34