Showing papers on "Divestment published in 1992"

Why Hang on to Losers? Divestitures and Takeovers

Abstract: We study the divestiture decisions of managers who care about their reputations. Managers' divestiture and investment decisions are publicly observable, but managers privately observe signals with respect to the future payoff distribution of investments they have initiated. We establish that in equilibrium there is too little divestiture. These inefficiencies create the opportunity for wealth-enhancing divestiture-motivated takeovers. A key result is that only managers of targets with "middle of the road" asset specificity should consider the takeover threat credible. These findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity. Our analysis leads to several empirical predictions. OVERWHELMING EMPIRICAL EVIDENCE HAS documented large gains in shareholder wealth that arise from takeovers (Jarrell, Brickley, and Netter (1988), and Jensen and Ruback (1983)). The source of these gains has remained elusive, however. Although takeovers are followed by some infusion of new managerial talent, we have not witnessed the kind of profound post-takeover restructuring of the productive activities of target firms that would readily justify the documented wealth gains. A commonly observed post-takeover initiative is divestiture of some of the target's lines of business (Bhide (1989), and Bhagat, Shleifer, and Vishny (1990)). What is puzzling is that if the gains from takeovers stem from the anticipation of such divestitures, then why were these divestitures not undertaken by the target firm's management in the first place? The purpose of this paper is to provide a possible answer to this question. Our focus is on the divergence in incentives between managers and shareholders with respect to divestitures of ongoing projects. We show that managers might rationally decide to hang on to projects that should be divested in

Beatrice: A Study in the Creation and Destruction of Value

Abstract: This paper chronicles the history of the Beatrice company from its founding in 1891 as a small creamery, through its growth by acquisition into a diversified consumer and industrial products firm, and its subsequent leveraged buyout and sell-off. The paper analyzes the value consequences the firm's acquisition and divestiture policies, its organizational strategy, and its governance. The analysis sheds light on a number of issues in organization theory, strategy, and corporate finance, including the sources of value in diversifying aquisitions, the cost of over-centralization and weak corporate governance, and the mechanisms of value creation in the market for corporate control.

The effect of corporate divestments on shareholder wealth: The UK experience

Abstract: This is the first known study of stockmarket reaction to U.K. sell-off announcements. Earlier U.S. studies have found positive market reaction to sell-off announcements. Various of these have aimed to relate the magnitude of marketreaction to factors such as price declaration, completion of agreement and financial strength of divestor. This study also explores the impact of the above factors and their inter-relationships. Typical event-study methodology is used in estimating the size of the unexpected market reaction, the so called abnormal return. Separate analysis of sub-samples is undertaken in this study to help enhance our understanding of market response to corporate sell-offs. Examples of such sub-samples are price/no-price groups and completion/intention groups. This analysis provides explanations for some of the seemingly contradictory U.S. study results. A measure of financial distress, namely the z-score, is introduced to explore the "bankruptcy avoidance" hypothesis. We find a degree of financial distress prior to divestment to be inversely related to abnormal return - a result consistent with market approval for such "distress" sales. Relative size of divested part to parent is also shown to be positively related to abnormal returns. Price declaration seems to be vitally important in generating positive market response. Announcements of completed sell-offs along with the price is even more welcome by the market. Announcement of completed sell-offs with undisclosed price seems to induce market uncertainty and thus negative abnormal returns. Announcement of intended sell-offs with price disclosure as well as our overall sample results both provide statistically significant positive shareholder gains. This, latter finding is in harmony with U.S. studies.

Wealth Effects for Buyers and Sellers of the Same Divested Assets

Abstract: There has been a major restructuring of corporate assets over the past decade in America. Some of the most notable restructuring activity includes mergers of whole firms. However, much restructuring involves the selling and/or buying of units, divisions, and selected assets of firms. These types of nonmerger restructuring of divisions and assets are called sell-offs and/or divestitures and are the focus of this study. Sell-offs typically occur to strategically realign the firms' assets and streamline operations or to raise capital for firms in financial difficulty or close to financial distress. Moreover, the sales of divisions or divested assets are often made without competitive bids from more than one firm. Often the price of the transaction is not made public at the announcement of the divestiture. There have been other studies that have measured the wealth impacts of divestitures on the buyers and sellers separately, but the purpose of this paper is to measure the wealth effects of both the buyers and sellers of the same divested assets to determine how these wealth gains are shared among buyers and sellers in a controlled sample of matched pairs.

The politics of telecommunications regulation : the states and the divestiture of AT&T

Abstract: Originally published in 1992. This text is a work from a series entitled ' Bureaucracies, Public Administration and Public Policy. The Politics of Telecommunication regulation: The States and the Divestiture of AT&T is an example of high-quality policy analysis conducted at state level. It substitutes for simple theories of public policy more complex and interesting explanations and relies on massive and time-consuming data-gathering that gives careful attention to measurement issues, providing a sophisticated empirical analysis to evaluate the utility of public policy theories.

Buy-outs, divestment, and leverage: restructuring transactions and corporate governance

Abstract: This paper examines the role of buy-outs, divestment and other restructuring transactions as devices which may counter acknowledged weaknesses in the market for corporate control relating to managerial entrenchment strategies, acquisitions motivated by managerial interests, inadequate information availability to outside bidders and free-riding by target shareholders. Such devices strengthen corporate governance through informed management achieving significant equity ownership, high leverage to force management to seek profitable projects or pay out free cash flow and/or divest assets. Evidence reviewed in the paper shows that, on balance, restructuring transactions have a positive impact on performance at least in the short term. However, there remains considerable debate as to whether buy-outs in particular are long term or merely transitory structures. There is increasing evidence to suggest that the longevity of buy-outs is bi-modal--some change quickly, many remain as buy-outs for long periods. Copyright 1992 by Oxford University Press.

Divestiture of State Enterprises: An Overview of the Legal Framework

Abstract: Divestiture objectives, constraints and approaches differ widely from country to country and enterprise to enterprise. This paper presents a general approach for the development of a legal framework for divestiture of state-owned enterprises in the industrial and services sectors. It does not discuss divestiture of housing, land or agricultural enterprises. It is in no way exhaustive, nor does it purport to capture all the nuances of specific divestiture. On most of the topics covered, specific legal literature exists to which the reader should refer for further information. Macro-legal aspects of divestiture are emphasized, while legal issues arising at the transaction level (the micro-legal aspects of divestiture) will only be addressed incidentally. Non-legal aspects of divestiture are mentioned only to the extent needed for the purpose of the paper. The focus is thus on the development of an overall legal framework conductive to divestiture. The main purpose of this paper is to increase the legal awareness of officials involved in divestiture programs by providing an overview of the range, complexity and potential significance of legal issues that may be encountered.

The experience with privatization

Abstract: Although the debate on privatization in general and divestment of state-owned assets in particular has been at the center of the economic and sociopolitical discussion of the PETs, the progress made by early 1992, when the manuscript of this book was finalized, remained rather tepid. Except for a few spectacular sales, mostly to foreigners, and putting in place more or less rounded laws on privatization, most action has been in the form of petty privatization. Though even here progress has been quite uneven. Particularly in the course of 1991, rapid advances in such divestment were made notably in Czechoslovakia, the former GDR, and Poland. In Hungary, progress has been steady but slow. Several other countries (including Bulgaria, Romania, the Baltic states, and possibly Albania, Mongolia, and the other Soviet successor republics) are also planning to move forward quickly with it. The process was well under way in Yugoslavia too in 1990, but it quickly became mired by ethnic strife and paralysis of the polity. Neither Croatia nor Slovenia has made much progress since independence. And elsewhere there is at best talk about privatizing.

How well does privatisation achieve government objectives? the case of bus buy-outs

Abstract: This paper examines whether privatisation objectives are achieved in the bus industry. The paper identifies the following effects in relation to government objectives. First, whilst the high level of buy-out activity in the privatisation process appears to have recognised the importance of individual skills, the extent of wider employee ownership has been rather lower and the high level of subsequent merger activity has often made manager/employee ownership a transitory phenomenon. Second, there is considerable evidence of underpricing with often substantial increases in value occurring in the short time between buy-out and sale to a third party. Although the National Audit Office reports some success by negotiators in increasing sale prices and some use of clawback mechanisms, there are indications of undervaluations and weaknesses in the sale process which led to such problems. Third, privatisation seems to have brought lower unit costs and contributed to product innovation. Subsidy costs also appear to have been reduced. But, fourthly, entry deterrence has been a problem. Entrants appear either to have been deterred by the costs and low profitability involved and predatory behaviour by incumbents. Statutory entry requirements have been substantially removed but the market may have 'natural monopoly' features in local markets. This point implies further shake-out and a lessening of competition as groups and alliances begin to emerge. The immediate period following deregulation may be interpreted as one of disequilibrium, where new firms entered, most were quickly driven out and those that survived did so by colluding with existing firms. Recent court decisions appear to have cast doubt on the ability of UK anti- merger legislation to deal with these problems through enforced divestment. (A)

Singapore Telecom: From Public Sector to Private Sector

Abstract: The Singapore Public Sector Divestment Committee has recommended privatization of public enterprises, including profit‐making monopolies such as Telecom, airport, port authority and broadcasting. Reviews preparation to privatize Singapore Telecom. Examines Telecom′s diversification strategy to enhance its visibility and international competitiveness. By maintaining its impressive profitability record, Telecom can be assured of a favourable reception by domestic and foreign investors when its shares are floated in 1993. Being the first statutory board to be privatized, its transformation is closely observed by others in the pipeline.

Views on Social Responsibility: The Investment of Pension Funds in the Evangelical Lutheran Church in America

Abstract: In 1989 an Evangelical Lutheran Church in America assembly resolution called for the divestment of all church pension funds of any South African holdings. The resolution provoked considerable controversy and this study is an analysis of data collected shortly after the resolution passed. The study explores the views of three groups of clergy. Two of the groups were already participating to some degree in pension options that were free of South African investments. The study shows that significant differences existed between clergy groups particularly when it comes to the question of how the church should invest its pension funds and the relationship of those investments to issues of social justice. Finally, the study suggests that the level of denominational conflict over the investment of pension funds was limited by the structural independence of the ELCA churchwide assembly and the Board of Pensions of the ELCA.

Yugoslav Multinationals Abroad

Abstract: Introduction and objectives the phenomenon of Yugoslav direct investment, contextual and thematic aspects integration into the World Economy development of international, inter-firm linkages growth of East European foreign direct investments, the special character of the socialist multinational enterprise, Yugoslavia in the World Economy evolution of Yugoslavia's foreign trade, long-term cooperation with foreign partners in Yugoslavia, Yugoslav industrial activities abroad, origins and evolution of Yugoslav multinationals, profile of Yugoslav external investments geographical and functional distribution, scale of operations, methodology the questionnaires, the sample of Western firms, the sample of LDC firms, Yugoslav investments in the West motivation, success, entry strategy, functional control of subsidiary, Yugoslav investments in the Third World motivation, ownership patterns, problems and reasons for divestment.

Control, internal organization and divestment: experimentation and the boundaries of financial services’ firms

Abstract: Organizational structure is influenced by both the nature of a firm’s operating environment and by the strategy which is developed to enable the firm to perform in that environment This operating environment can be seen to have both internal and external dimensions, although it is in the external environment that the most rapid change is likely to occur The importance of rapid changes in the external environment in generating major strategic change is widely recognized; these changes have equally important consequences for organizational structure, since major strategic change is likely to require a re-evaluation of existing organizational arrangements and control systems The form of the links between organizational structures and control systems is highlighted in Ezzamel (this volume) who makes use of the framework developed by Ouchi (1981) For example, various performance measures, incentive mechanisms, monitoring of the takeover market, etc may be applicable in hierarchical organizations, whereas the price mechanism (perhaps augmented by closer managerial control in certain relationships) is the principal means by which markets operate Hence formal delegation may not be a prerequisite for a system of control (Hilton, 1975, and also this volume)

India's New Economic Policy: Its Immediate Impact

Abstract: The new economic policy was introduced in 1991. A short review of the changes it has effected in foreign collaborations, foreign trade and public sector divestment is given. This is contrasted with the QR (Quantitative Restrictions) policy formerly adopted by India for 40 years. This enables one to get a historical perspective.

Divestment Strategy and Share Valuation: Case Study of a Public Sector Development Bank in India

Abstract: Development Banks (DBs) are specialized financial institutions created for the purpose of balanced industrialization. A development bank has to act more as a promotional agency than a mere financial institution. Therefore separate institutions have been set up, namely State Industrial Development Corporations (SIDCs) in almost all the states in India for undertaking promotional activities. With the growing role of Development Banking in India, the SIDCs are facing financial hardships as they are wholly dependent on Government grants. The paucity of funds for SIDCs has prompted them to opt for divestment of their shareholdings from the existing units to recycle the funds for increasing industrial promotion. Divestment decisions are concerned with the quantum and timing of divestment and the determination of share prices for this purpose. SIDCs are different in that their divestment decisions need not be primarily guided by economic factors (capital appreciation). Highlights the divestment policy and share ...

Profile of Yugoslav External Investments

Abstract: This chapter takes a comprehensive view of the nature and extent of Yugoslav multinationals in both West and South. The analysis covers the ownership structure, scale of operations, and distribution by sector and country. A detailed analysis of motivation, performance and success, and reasons for divestment is provided in subsequent chapters.

Management Sponsored LBO's: Considerations for Valuation

Abstract: Richard E Kaufman, Professor of Finance and Carl H. Walther, Professor of Finance respectively, Department of Management, School of Business Administration, The California State University, Sacramento, Sacramento, CA, U.S.A. Introduction Management buy-outs -- new firms created by managers breaking off from existing firms -- have for several reasons become a familiar phenomenon on both sides of the Atlantic. Managers are motivated by increased financial rewards and a desire to satisfy personal ambitions (Garvin 1983, pp, 5-7; Osborne 1990, p. A10). Corporations are motivated by buy-over-make cost advantages and a desire to release capital for other more lucrative ventures (Wright 1986, p. 450). In Europe, the future growth potential for such firm spin-offs appears significant as managers recognize the potential from new economies of scale and of scope in the single market environment, and the benefit of production cost differentials between community members, and technology transfer. Past research of the management buy-out process has focused primarily on: shareholder wealth (Torabzadeh and Bertin 1987, pp. 314-315; Lehn and Poulsen 1989, p, 771; Briloff 1990, p. 188), and economic considerations (Wright and Coyne 1985, p. 137). Managers motivation to make offers to buyout portions of their parent companies can be summarized from the literature to include the following issues: (a) Managers recognize opportunities to extend coverage of contracts over the limit which could otherwise be reached by the internal organization (Kaplan 1989, p. 615). (b) Managers may perceive attractive exterior markets for intermediate goods, produced internally by the firm. These markets may not be consistent with the main objectives of the firm (Butler and Carney 1983, p. 214). (c) Allocation of funds makes it worthwhile for managers to divest to a new entity where more favorable financing can be obtained, not otherwise available to the parent due to capital covenants (Leleand 1989, pp. 24-26). (d) Managers posses insider information advantages and corporate cultural values over other corporate competitors who might provide the same services or goods in the wake of a vacuum created by such a divestiture (Dalton 1989, pp. 38-39). Traditionally, the corporate decision as presented in diversified make-or-buy decision models is based on net present value selection rules. Recently, however, the surge of leveraged buy-outs has introduced in the literature an approach to externalize transactions within the firm by managers which alters the basic assumptions for net present value calculations (Wright 1986, pp. 450-451). Externalization of transactions in the management LBO often benefits economies of scale which exceed the benefits possible from internalization. An example is the production facilities found in vertical-structured organizations which are underutilized because of corporate-structured goals being expanded through concentric or horizontal diversification (Monteverde and Teece 1982, pp. 321-323). A second premise for externalization of transactions might be increased economies of scope where production of multiple products in the large organization become exhausted. In such instances, a subsidiary may be divested throught leveraged financing to form an independent, specialized entity in a more efficient way rather than becoming absorbed into a larger, specialist company. The performance of management-sponsored buyouts has been mixed. Wright suggests that a large percentage of divestitures by current managers through leveraged financing arrangements disappear during the first year for one reason or another (Wright 1986, pp. 456-459). Such failures seem inconsistent with the trend of entrepreneural business ventures since LBO spinoffs are usually in the hands of experienced managers. Wright's attrition rate is comparable to many venture capital sponsored projects where risk is inherently high. …

Divestiture, By-Pass, Entry, Cross Subsidization: Conflicting Forces in the Deregulation of the South Dakota Telecommunications Market

Abstract: This study reviews the impact the divestiture of AT&T had on the South Dakota telecommunications market, and explains the technological changes that have occurred and how these changes have been translated into lower costs. The South Dakota telecommunications market is examined under the scenarios: 1) fully regulated; 2) partial regulation; and 3) unregulated market. ARIMA procedures are used to forecast changes in revenues under the two different regulatory schemes. The degree of constestability of the South Dakota Telecommunications market is investigated to determine if competitions is suitable for the unregulated scenario. The study argues that the market is competitive. DIVESTITURE, BY-PASS, ENTRY, CROSS-SUBSIDIZATION: CONFLICTING FORCES IN THE DEREGULATION OF THE SOUTH DAKOTA TELECOMMUNICATIONS MARKET INTRODUCTION During the 1980s, three basic events occurred that shaped the business environment of the telecommunication industry in the United States and South Dakota in particular. First, the divestiture of AT&T of its operating companies in 1984; second, the growth of technology; and third, the host of new entrants providing long distance services. These lower priced, nonregulated wresellerw companies proliferated when the high-volume users were encouraged by the Wby_passw alternative to avoid the regulated access fees of the .. • ___--_ . ., __---_..__~~...<~.v_"._ .. "~ -~----==_____ Regional Operating Bell Companies (ROBC's). -------­ In South Dakota, the ROBC was Northwest Bell (NWB), later to be merged into U.S. West. The managerial issue faced by the South Dakota Public Utility Commission (pUC) was how to determine prices for NWB services. The alternatives were that the PUC retain price management or let the market determine prices. NWB had been a regulated natural monopoly and the provider of last resort for universal or in home service. Universal service rates had been cross-subsidized substantially. Long distance rates had been held artificially high and had become a convenient means for regulators to subsidize local telephone service (Crandall, 1988). Paradoxically, continued regulation would weaken NWB, eventually leading to higher charges for universal service to maintain reasonable rates of return. A worse-case possibility was that NWB would end up like the railroads in South Dakota (also a provider of last resort) with a monopoly over low-margin, non-profitable business and little of the high-margin, profitable business. REGULATED MARKET ENVIRONMENT Historically, rate-of-return regulation of the telephone industry had been justified on the basis that it was a natural monopoly, where the natural monopolist was the sole provider and seller of a good or service , because technology made single firm production cheaper than any other alternative. The natural monopolist differed from the~monopo~that the technology was freely available to all potential competitors. ~AVI. fvt>1 ~ ./If-1(1vP.. at .J'Uu~ J.u..~~~'f 1 The rapid rate of deregulation thatoccurred in the late 1970s and £980s in the airlines, trucking, banking, and railroads industries was not as pervasive in the telephone industry, particularly for intrastate long 4 distance services. AT&T had been broken up as a result of the 1982 antitrust settlement, divesting itself of the RBOC's as specified in the Modified Final Iudgment in 1984. (Crandall, 1988) (i)Competitive entry by new firms occurred slowly at first but then accelerated largely because of two ~--factors. First, the access fees for toll services of the regulated RBOC's were held at presett1ement rates, while non-regulated "resellers" were guaranteed access fees set near the incremental cost of connecting the calls at each end. These regulated presettlement rates for toll and private line services led to a continuous drain of high volume customers and revenues away from the regulated RBOC's as the "by-pass" option prompted customers to seek lower priced alternatives for intrastate toll services. (Iackson and Rohlfs, 1985; USTA, 1984; Yankee, 1985) Second, the continued advance in electronic technology led long-distance switching equipment to fall precipitously in price, which in tum led to substantially lower first-cost entry barriers for new s.ompetitors and/or resellers. (Framm,1981)