Showing papers on "Divestment published in 2006"

Globalfocusing: From Domestic Conglomerates to Global Specialists*

Abstract: Globalization is changing the competitive terrain on which companies develop their corporate strategy. On the global stage, key competitive advantages are gained through internationally fungible resources. Consequently, diversified conglomerates are converting to global specialists in narrower niche markets and competing with a small number of multinational enterprises operating worldwide. Their internationalization and their reduction of product diversification are opposite sides of the same coin: globalfocusing. I extend Penrosian resource-based theory to analyse this change process, notably by distinguishing country and industry specificity of firms' core competences, and by integrating divestment as part of firm growth processes. Globalfocusing is driven by shifts in the relative importance of country-specific and industry-specific resources and capabilities due to changes in the internal and external environment, notably the globalization of markets and supply chains. The argument is developed using case studies of restructuring of two Danish manufacturing enterprises. On this basis, I analyse the forces driving globalfocusing processes and suggest propositions for empirical testing.

Foreign investment, divestment and relocation by Japanese electronics firms in East Asia

Abstract: Although foreign divestment and international relocation by multinational firms carry important economic implications for the industrialization of East Asian countries, there has been little empirical research on these issues. In this paper we analyze the magnitude and pattern of foreign divestment and relocation by Japanese electronics firms in nine East Asian countries during 1995‐2003. The average annual divestment rate of electronics manufacturing affiliates is 3 percent, but divestment patterns diverge strongly across countries. Divestments are much more frequent in higher labor cost countries and in approximately one-third of cases are accompanied by relocations to lower wage countries, particularly to China. Evidence is found for rivalry between China and ASEAN countries in attracting foreign direct investment, but the growing attractiveness of China has not been accompanied by a reduction in employment in Japanese affiliates in ASEAN countries (with the exception of Singapore). Divestments and relocations are related to Japanese firms’ strategy to reconfigure their Asian production networks in response to changing competitiveness, regional integration, and changes in local investment environments.

Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options

Abstract: We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty. Copyright Oxford University Press 2006

Trading strategies in the market for tankers

Abstract: This paper introduces a new approach in timing the sale and purchase of ships in the tanker market and examines the performance of this trading strategy over the period January 1976 to September 2004. Based on the long-run cointegration relationship between earnings and price, we establish a trading model which can be used as an indicator of investment or divestment timing decisions. We also perform statistical tests using the bootstrap approach in order to discount the possibility of data snooping biases and test the robustness of our trading models. Our results indicate that trading strategies based on earning-price ratios significantly out-perform buy and hold strategies in the tanker market.

On the Merits of Vertical Divestiture

Abstract: This paper demonstrates that vertical divestiture may increase consumer welfare even when the divestiture eliminates substantial scope economies and precludes only limited sabotage. More generally, the merits of vertical divestiture are shown to vary with: (1) the type and the intensity of competition in the retail market; (2) the locus of scope economies under vertical integration; and (3) the relative social values of consumers’ surplus and profit.

Economic and Legal Boundaries of Firms

Abstract: Two types of theories of the firm have emerged in scholarship. Economic theories concern the allocation of control rights and residual claims: A firm is a group of assets under common ownership. Legal theories focus on the legal significance of firm boundaries: Each firm is a legal person. Thus, assets may be economically integrated under common control and yet be partitioned between distinct legal entities. This paper presents a theory of legal boundaries that focuses on the choice of capital structure, and traces the interplay between economic integration and legal partitioning. The law treats many capital structure decisions, including both financial and governance features, as in personam rather than in rem. Thus, these decisions must be made firm-wide: for example, the issuance of debt or of equity, the adoption of takeover defenses and the composition of the board of directors. Yet, the determinants of optimal capital structure are often asset-contingent: for example, the amount of leverage, the desirability of takeover defenses and the number of independent directors may vary with the industry. The resulting tension is significant in the choice of firm boundaries. If two groups of assets have divergent capital structure demands - in that the optimal design of financial and governance rights related to each group is different - then either the assets are put in separate firms that tailor capital structure to their respective asset groups or they are combined in a single firm with a blended capital structure. We suggest that "legal" integration in a single firm sacrifices efficiency in some cases, but not in others. Where the efficiency losses are large enough to offset countervailing advantages from legal integration, legal partitioning might occur. However, we also demonstrate that legal partitioning may undermine the benefits from economic integration, even if the discrete firms are kept under common control (as that concept is defined in law). Our theory thus suggests additional factors to be considered in explaining the structure of combinations (e.g. mergers or acquisitions) and divestitures (e.g., spin-offs, carve-outs or securitizations).

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

Abstract: We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.

The Smart-Seller Challenge: Exploring the Determinants of Privatizing Public Nursing Homes

Abstract: This study investigates the determinants of local governments' decisions to privatize public nursing homes. According to the Online Survey, Certification, and Reporting (OSCAR) 2004 data, more than 100 counties in the United States have recently divested their nursing facilities through change of ownership to nonprofit or for profit or through termination. The theoretical model used in this study proposes four broad categories of antecedents of the privatization decision: market failure, government failure, and monetary and institutional factors. County governments are viewed as rational actors, affected by a range of external and internal pressures and striving to maximize the attainment of their complex missions. The data used in this study come from the OSCAR 2004 file and several other sources. Using logistic regression analysis, the baseline (1998-2000) measures of all independent variables for 622 county-owned homes were regressed on the dummy dependent variable, indicating whether the nursing home was privatized by 2003 or not. Quantitative analysis was supplemented with two exploratory case studies. Local market competition, occupancy level, condition of the physical plant, staffing, the prevalence of privatization in the neighboring counties, and the proportion of elderly in the county were found to be significantly associated with the likelihood of nursing home divestment. The analysis supports the idea of a complex framework of managerial decision making: counties appear to be smart sellers by divesting when occupancy declines, when the physical environment deteriorates, and when private markets are relatively more competitive. They are also found to be smart owners by sustaining public ownership of thriving public facilities surrounded by failing private markets.

Fiscal versus social responsibility: how Philip Morris shaped the public funds divestment debate.

Abstract: Calls for institutional investors to divest (sell off) tobacco stocks threaten the industry's share values, publicise its bad behaviour, and label it as a politically unacceptable ally. US tobacco control advocates began urging government investment and pension funds to divest as a matter of responsible social policy in 1990. Following the initiation of Medicaid recovery lawsuits in 1994, advocates highlighted the contradictions between state justice departments suing the industry, and state health departments expanding tobacco control programmes, while state treasurers invested in tobacco companies. Philip Morris (PM), the most exposed US company, led the divestment opposition, consistently framing the issue as one of responsible fiscal policy. It insisted that funds had to be managed for the exclusive interest of beneficiaries, not the public at large, and for high share returns above all. This paper uses tobacco industry documents to show how PM sought to frame both the rhetorical contents and the legal contexts of the divestment debate. While tobacco stock divestment was eventually limited to only seven (but highly visible) states, US advocates focused public attention on the issue in at least 18 others plus various local jurisdictions. This added to ongoing, effective campaigns to denormalise and delegitimise the tobacco industry, dividing it from key allies. Divestment as a delegitimisation tool could have both advantages and disadvantages as a tobacco control strategy in other countries.

Lobbying at the Local Level: Social Assets in Russian Firms

Abstract: In the planned economy firms were made responsible for providing their workers with so-cial services, such as housing, day care and medical care. In the transforming Russia of the 1990s, social assets were to be transferred from industrial enterprises to the public sector. The law on divestment provided little more than general principles. Thus, for a period of several years, property rights concerning a major part of social assets, most notably hous-ing, were not properly defined, as transfer decisions were largely left to the local level players. Strikingly, the time when assets were divested varied considerably across firms. In this paper we utilize recent survey data from 404 medium and large industrial enterprises in 40 Russian regions and apply survival data analysis to explore the determinants of dives-titure timing. Our results show that in municipalities with higher shares of own revenues in their budget and thus weaker fiscal incentives, firms used their social assets as leverage to extract budget assistance and other forms of preferential treatment from local authorities. We also find evidence that less competitive firms were using social assets to cushion them-selves from product market competition. At the same time, we do not find any role for lo-cal labor market conditions in the divestment process.

European integration and the dynamic process of investments and divestments of foreign TNCs in Greece

Abstract: Purpose – The purpose of the paper is to analyse how European integration shapes the locational decisions of foreign transnational corporations (TNCs).Design/methodology/approach – The paper concentrates on foreign direct investment (FDI) in the European Union (EU) and highlight the case of Greece. The investigation is based on a wide original sample of 199 foreign industrial subsidiaries operating in Greece. In particular, the paper reveals the dynamic investment and divestment strategies of TNCs in the host economy, which have taken place in the context of the reduction of EU market fragmentation and barriers to entry.Findings – The empirical results suggest, that, in general, the participation of Greece in the EU has not increased the attractiveness of the country as a production base for TNCs. In fact, Greece did neither manage to attract considerable amounts of export oriented foreign investment nor did it receive much efficiency seeking FDI.Research limitations/implications – The findings show for t...

The effect of corporate divestments on shareholder wealth: The South African experience

Abstract: (2006). The effect of corporate divestments on shareholder wealth: The South African experience. Investment Analysts Journal: Vol. 35, No. 63, pp. 19-30.

The Boundaries of the Firm: The Choice Between Stand‐Alone and Integrated Firms

Abstract: This study presents a theory of corporate structure selection. It outlines when economic units should be structured as stand-alone firms versus an integrated firm (conglomerate). The theory suggests that an integrated firm better controls agency problems through yardstick competition between managers for project acceptance. However, this structure reduces the ability to receive division-specific project information from the market. Based on this trade-off, we show that divisions within a conglomerate have different characteristics and, thus, different valuations than “similar” stand-alone firms. Our theory also explains differences in the required rate of return between stand-alone firms and conglomerates and how they relate to relative valuations of conglomerates and “similar” stand-alone firm. It also predicts when stock price reaction to divestiture and merger announcements will be positive or negative.

Spinoffs and Carveouts: Some Factors Leading to Successful Divestiture

Abstract: EXECUTIVE SUMMARY This paper tests the anecdotal literature related to the reasons that lead to a successful outcome (by reducing failure rate) of corporate divestitures, specifically, spinoffs, carveouts, and carveouts-to-spinoffs Four variables were tested: 1) focus industry concentration; 2) revenue size of parent; 3) revenue size of spinoff/carveout; and 4) divestiture reasons Parent size and revenue size together comprised an unquestionably significant influence on failure rate for these divestitures Parent size alone and revenue size alone were also unquestionably significant Therefore, larger parent size and larger revenue size of the divestiture does matter in creating a successful outcome by reducing failure rate Industry concentration focus and divestiture reasons were significant, but to a lesser extent in comparison to parent size and revenue size Keywords: Corporate Divestitures, Spinoffs, Carveouts, Asset Restructuring, Value Creation INTRODUCTION Although empirical studies have addressed whether spinoffs and/or carveouts have been successful based on financial performance and survival (see Literature Review), there has been no study that addresses what makes these types of corporate divestitures successful This paper builds on the existing spinoff and carveout literature by adding possible reasons why some spinoffs and carveouts succeed while others fail These reasons include: the size of the parent, the size of the divestiture, the reason(s) for the divestiture, and the concentration of the parent before divestiture Other variables were explored and allowed to interact with these reasons They included the type of management team, management ownership, type of divestiture, funding and the nature of the technology Large organizations need to maintain the opposing forces of stability and change This challenge may be met by recognizing that different requirements of different strategic situations exist simultaneously in organizations (Burgelman, 1983, 1991) It is evident that certain divisions within a conglomerate or portfolio of businesses may need different strategic guidance, specifically those that require entrepreneurship and experimentation In these cases, it may be in the best interest of the parent to spinoff or carveout units or divisions that do not fit the overall strategy of the parent Moreover, with the merger craze of the 80's and 90's, many large conglomerates did not experience the benefits they had hoped for According to a Wall Street Journal article, entitled "Big Mergers of '90s Prove Disappointing to Shareholders," many merger deals in the late 1990s such as ATT thus spinning off some of their divisions, some experts believe, may make each individual division more efficient (Berman et al …

Divestment of Foreign Manufacturing Affiliates: Country Platforms, Multinational Plant Networks, and Foreign Investor Agglomeration

Abstract: We develop hypotheses concerning the impact of multinational firms' international plant networks and host country foreign investor agglomeration on the divestment of manufacturing affiliates, drawing on real option theory and location and agglomeration theory. We test our hypotheses on a comprehensive sample of 1078 Asian manufacturing affiliates of Japanese multinational firms in the electronics industry during the turbulent years preceding and into the Asian financial crisis (1995-1998). We find evidence that multinational firms both maintain flexibility options by operating a network of platform affiliates in multiple Asian countries, and exercise these flexibility options through divestments of affiliates that do not add flexibility value. Affiliates of which the location decision at entry was dominated by the local presence of Japanese investor agglomeration or buyer-supplier agglomeration within vertical business groups have higher divestment rates, suggesting that agglomeration leads to 'adverse selection' of affiliates with weaker competitiveness.

The Antecedents and Consequences of Emerging Market Divestitures

Abstract: Divesting assets owned in emerging markets has substantive consequences for the multinational corporation. In this paper, we examine two dimensions surrounding the decision to divest a business in an emerging market: institutional effects impacting the timing of the divestiture, and the effects of the ownership structure on the stability of the venture. Also, we explore the consequences of divestment on the sale price of the assets. We use a proprietary database of all acquisitions in Argentina (> US$1 million) for the period 1990-2002 to test our hypotheses.Our evidence supports the existence of institutional and ownership effects on the propensity to divest, which in turn affect the divestiture price.

The Financial and Economic Lessons of Italy's Privatization Program

Abstract: Since 1994 the Italian government has sold equity stakes in some 75 large state enterprises, in the process raising over $125 billion-more than any other country during the same period. In this article, a U.S. academic collaborates with the Italian government's Director of Privatization in summarizing the accomplishments and disappointments of Italy's privatization program, assessing its impact on Italian capital markets, and offering lessons for other countries embarking on new privatization programs. The article also describes the share issuance methods used by the government to execute several massive offerings, including the largest IPO in history. The principal benefits of Italian privatization have been dramatic increases in the size and efficiency of Italy's stock markets and in the safety and stability of its banking system. Despite such improvements, however, privatization has failed to bring about the increased competition in key industries and lower prices for consumers its planners originally envisioned. And based on this experience, the authors offer a number of lessons for government planners. Perhaps most important, privatization is likely to yield decisive benefits only if the divestment program is properly designed and sequenced. Governments should begin by privatizing state-owned banks and other financial institutions, and as quickly as economically and politically feasible. Especially in less developed economies, commercial banks are for many companies both the only suppliers of credit and the only effective source of market discipline-which explains why results have often been disastrous when governments have retained control of banks while privatizing other industries. Privatizing governments should also emphasize privatizations accomplished through share issuances rather than asset sales, with the aim of developing liquid and efficient stock markets and promoting effective corporate governance.

Foreign Asset Divestitures by U.S. Firms: An Analysis of Motives and Valuation Consequences

Abstract: We test a set of theoretic postulates predicting the choice and value impact of foreign asset divestiture strategies. Following Chen and Gou (2005), we argue that firms may be driven by a variety of motives to divest their foreign assets depending on their pre-divestiture performance, financial structure, possible existence of agency conflict, scale and scope of their business operations, and future growth opportunities. We find support for the financial distress hypothesis only in the case of those financially constrained firms that reduce their leverage in the post-divesting period. Further, we report support for the capital constraint hypothesis for firms that have a record of high capital expenditures in the pre-divestiture period and that are relatively free from agency conflict. Finally, our results support the focus hypothesis for over-diversified firms.

Evaluating the market reaction to UK divestitures

Abstract: Purpose – To determine whether the abnormal returns accruing to UK companies undertaking a divestiture are different when the unit sold is in the UK or elsewhere and to specifically hypothesize that returns generated by a domestic sale will be higher than those resulting from an overseas sale.Design/methodology/approach – Using a sample of 668 divestitures reported on securities data corporation (SDC) Platinum database, and share price data from DataStream, both abnormal returns and cumulative abnormal returns (CARs) are calculated around the announcement date using the market model.Findings – That the announcement of a divestiture generates positive abnormal returns for shareholders. Further, that the announcement of a UK divestiture generates a significantly larger positive market reaction than the announcement of an overseas divestiture. For the divestiture of units located outside the UK it is found that the largest CARs are generated when the buying firm is based in the UK.Originality/value – Here th...

Corporate Structure And Capital Strategy At Catholic

Abstract: PROLOGUE: The hospital competitive landscape has endured often convulsive transformation during the past decade. The industry has been buffeted by conflicting forces, hampering its health as a sector and influencing the strength of its competitive posture with respect to other components of the health care delivery system. Such factors have, at various times, included persistent overcapacity, misallocation of institutional assets and resources, low payment rates, aggressive competition from physician-owned entities and specialty hospitals, and the increasing burden of uncompensated care. Under the conventional competitive wisdom that size begets strength, such market forces have sparked a trend toward rapid and aggressive hospital mergers and the ascendancy of hospital systems operating as integrated delivery systems. And, as we learned from Health Affairs’ 2003 thematic issue on hospitals, hospital consolidation, by way of hospital systems acquiring other hospitals, far outstripped the competitive transformation achieved through mergers. This paper analyzes the market and capital investment strategy at Catholic Healthcare West (CHW) between 1996 and 2005 to illuminate the strengths and weaknesses of chain organization. Abandoning its erstwhile focus on integrated delivery and growth for growth’s sake in favor of selective divestments and investments, CHW achieved a remarkable turnaround in operating earnings and financial asset strength. As a nonprofit organization with religious sponsorship, however, CHW also developed a strategic approach to how to balance the financial investment and divestment priorities with those stemming from its charitable mission. The paper illustrates CHW’s strategy to distribute capital investments across the system’s forty hospitals in terms of each facility’s profitability, the economic prospects of the market in which it is located, the extent to which it provides charitable services, and the social and health needs of its community.

The temporal dynamics of the divestiture process

Abstract: Despite their major theoretical and practical relevance, the temporal dynamics of the divestiture process “ including aspects such as the starting and ending point of the divestiture process, the timing of divestiture announcements, the lag between divestiture announcement and operative actions, the unfolding of these actions, and the importance of different time views (objective vs. subjective) more generally ” have remained unexplored. The longitudinal, event-based study of how Siemens, Europe's largest electronics' company, divested its semiconductor business and two other electronic components' units in the late 1990s addresses this broad set of unresolved issues. Specifically, the paper unravels the starting and ending point of the divestiture process and highlights potential determinants both for the starting point (e.g., capital market's subjective time view) of the process and for the timing of the actual announcement of the divestiture decision. Moreover, the paper documents the different stages in the unfolding of the divestiture process. It unravels the lags and sequence in which actions occur and outlines how different “time clocks” and subjective time views impact on the entire process. Thereby, the current paper contributes to extant research by a.) revisiting and revising taken for granted assumptions on the temporal dynamics of divestitures (e.g., its starting and ending point), b.) by extending current knowledge in respect to the timing of divestiture announcements, c.) by acknowledging not only the importance of objective but also subjective time views, and d.) by generating new insights into the unfolding, sequencing and timing of multiple divestitures.

The Great Divestiture: Evaluating the Welfare Impact of the British Privatizations, 1979-1997

Abstract: The privatization carried out under the Thatcher and Major governments in Britain has been widely (although not universally) considered a success, and has greatly influenced the privatization of state industries in the transition economies of Eastern Europe. Massimo Florio's systematic analysis is the first comprehensive treatment of the overall welfare impact of this broad national policy of divestiture. Using the tools of social cost-benefit analysis, Florio assesses the effect of privatization on consumers, taxpayers, firms, shareholders, and workers. His conclusion may be surprising to some; his findings suggest that the changeover to private ownership per se had little effect on long-term trends in prices and productivity in Britain and contributed to regressive redistribution. After historical and theoretical overviews of privatization and a look at macroeconomic trends in the Thatcher-Major era, Florio considers in detail the microeconomic effects of British privatization on several key groups. In successive chapters, he examines firms and productivity changes; shareholders' windfall gains and evidence of underpricing and outperformance in privatized companies; workers, management, and changes in industrial relations; consumers and the quantity and quality of goods after the change to public ownership; and taxpayers and the interplay between privatization and tax reform. He follows these chapters with a case study of British Telecom—significant not only because it was the largest divestiture of the period but also because of its influence on subsequent telecommunications privatization elsewhere. The final chapter considers the overall quantitative impact of the Thatcher-Major privatization on all sectors and its relationship with regulation and liberalization. The Great Divestiture not only offers an exhaustive analysis of the effects of the British process of privatization but also illustrates a method of inquiry and a testable research approach that could prove to be useful in similar studies of other countries.