M & A Case Study

This paper is devoted to the analysis of the effectiveness of divestment deals. The research evaluates the change in price for the target and acquirer companies due to the announcement of the deal. The paper consists of the following parts: introduction, main part and conclusion. The introduction will cover the background of the research, the problem statement and the professional significance. The main part will include the literature overview, cover the methodology of the analysis and the anticipated results. In the final part, conclusion, the anticipated results will be stated in relation to what was stated in the introduction.

Introduction

One of the types of M&A deals is a divestment. A divestment refers to the separation

The authors discuss two hypotheses which might explain spin-offs: (1) a firm with diverse operating units may divest a subsidiary allowing both the parent and subsidiary to use unique sets of contracts in which each has a comparative advantage, and (2) the gains are simply expropriations from senior security holders, such as bondholders and preferred stockholders, to common stockholders. Examining a sample of 53 senior securities of 31 divesting firms no support is found for the expropriation hypothesis. Instead the results are consistent with the contracting efficiency

Whereas usually two companies merger into one through an M&A deal, divestment results in a separation of a company into several companies. Thus, the divestment deal is considered effective if the value of two companies after the separation is higher than the value of a company before the divestment.

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The research studies if the divestment deals are an effective mean of value creation in real life and is carried out using econometric analysis.

The efficiency evaluation of divestments is conducted using an event-study method. Event-study conduction implements a review of a sample of deals. This includes the analysis of prices of acquirer and seller companies before the announcement of a divestment, right after the announcement and after the divestment is completed.

A sample of deals contains information about the acquirer and target names, deal value, seller, target and acquirer stock prices in different periods before and after the announcement and the completion of deal.

Results anticipated

According to the literature revised, the return from the divestment is expected to be positive. The value of the increase depends on the quality of the target. Higher return is expected when the business is underperforming or the company is overdiversified. The increase in price is anticipated for the seller and target or acquirer