Do corporations benefit from divesting to private equity acquirers? An empirical investigation

Abstract

Research Summary: From the perspective of the divesting firm, do divestitures to private equity (PE) acquirers perform differently from divestitures to corporate acquirers? If so, why? This question-based, empirical study shows that on average, divestitures to PE acquirers correlate with lower divesting firms' shareholder returns than divestitures to corporate acquirers. The study explores whether these lower returns when divesting to PE acquirers are explained by the differences in PE acquirers' distinct value creation strategies when it comes to target selection, ownership, or transaction timing. The results reveal that divesting firms' lower shareholder returns when divesting to PE acquirers are more likely correlated with differences in value creation by PE acquirers due to their distinct ownership and transaction timing strategies, but not their selection strategies. Managerial Summary: Private equity (PE) firms are prominent buyers of corporate divestitures, and PE firms' strategies for creating value when acquiring divested businesses tend to differ from those of corporate buyers. Yet the performance implications, from the perspective of the divesting firm, of divesting a business to a PE acquirer versus a corporate acquirer are not clear. In this study, I explore the differences in returns to firms divesting to PE acquirers versus those divesting to corporate acquirers. First, on average, divesting firms' returns are lower when divesting to PE acquirers. Second, these lower returns are more likely to occur when the PE acquirer may be expecting to create less value, or when firms choose to divest at a suboptimal time.