Sell-off as a consequence of takeover.

Abstract

Previous studies document that a substantial fraction of takeovers are sold off later. The mistake hypothesis and the positive synergy hypothesis are suggested as a rationale for these sell-offs, and tested using a sample of 266 tender offers from 1962 to 1986. To differentiate between these hypotheses, we investigate (i) the relation between abnormal returns at the time of announcement of takeovers and the existence of subsequent target sell-offs, and (ii) the aggregate wealth changes of the entire process of takeovers through subsequent target sell-offs. We find that at the time of takeovers, acquirers who subsequently sell the acquired assets experience significant negative abnormal returns, while acquirers who do not sell off obtain significant positive abnormal returns. These results are robust even after controlling the effect of competition, mediums of exchange, relatedness, and occurrence year of takeovers. We also find that although the market reacts positively to target sell-offs, the aggregate wealth changes, from the takeovers through the target sell-offs, are negative. On the basis of these results, we conclude that acquirers sell the acquired assets to correct their mistake at takeovers, rather than to obtain additional gains occurred to corporate environmental changes. Furthermore, we also attempt to trace the source of the mistake by investigating whether the effect of target sell-offs is different from that of non-target sell-offs (internally developed acquiring firms' assets). Since the market reacts more favorably to target sell-offs, we conclude that the mistake at takeovers seems to be due to negative synergies in targets rather than liquidity problems from overpayments for targets.