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RESTRUCTURING AND DIVESTITURES
Emilie R. Feldman
Introduction
Research in corporate strategy fundamentally seeks to address the question “How
do managers set and oversee the scope of their firms?” (Feldman, 2020), a key com-
ponent of which is the issue of which businesses they choose to participate in and
which they do not. Managers can pursue a range of strategies to make such decisions,
which can generally be grouped into two categories: (1) expansionary strategies, such
as mergers and acquisitions, alliances, joint ventures, and corporate venture capital,
which allow firms to increase their scope; and (2) contractionary strategies, such as
selloffs, spinoffs, carveouts, and asset restructuring, which enable firms to reduce
their boundaries.
Despite the fact that expansionary and contractionary corporate strategies are
inverses of one another, significantly more academic research has been conducted
about the former than the latter. In the last 10 years, for example, the Strategic
Management Journal published 144 articles about acquisitions, alliances, and joint
ventures versus 20 articles about divestitures.^1 This pattern is echoed in practice as
well. My analyses show that in 2019, U.S.-based firms undertook nearly three acqui-
sitions for every one divestiture they implemented. Nonetheless, contractionary
strategies have a significant potential for value creation, perhaps even more so
than expansionary strategies. For instance, my analyses of U.S.-based acquisitions
and divestitures over the last 10 years reveal that the shareholder returns to divest-
iture announcements are more than double the shareholder returns to acquisition
announcements, and my review of recent literature indicates that the average ab-
normal return to divesting firms upon divestiture announcements is +3.0 percent,^2
as compared to a –0.7 percent abnormal return to acquiring firms upon acquisition
announcements.^3
Together, these points suggest that contractionary strategies such as divestitures
and restructuring (henceforth, I refer to both as divestitures) are a very fruitful area
for investigation. In this chapter, I present an agenda for research into these phe-
nomena by surveying past and current literature about them and laying out some
productive directions for future research in this domain.
154 Corporate Strategy
Past Research
Past research on divestitures largely conceptualized these strategies as reactions to
negative occurrences that had previously happened either inside or outside of firms.
Some examples of internal problems that have been shown to prompt managers to
divest include declining firm or business unit performance (e.g., Duhaime and Grant,
1984; Duhaime and Schwenk, 1985; Jain, 1985; Hoskisson and Turk, 1990; Ravenscraft
and Scherer, 1991; Barker and Duhaime, 1997; Desai and Jain, 1999; Schlingemann,
Stulz, and Walkling, 2002); unsuccessful mergers and acquisitions (e.g., Kaplan
and Weisbach, 1992; Weisbach, 1995); over-diversification, especially when driven
by empire building (e.g., Jensen, 1986; Hoskisson and Turk, 1990; Markides 1992,
1995; Hoskisson and Hitt, 1994; Comment and Jarrell, 1995; Daley, Mehrotra, and
Sivakumar, 1997); and other manifestations of agency conflicts, including manage-
rial entrenchment or inefficient internal capital markets (e.g., Shleifer and Vishny,
1989; Scharfstein, 1998). Analogously, some external factors that have been shown to
induce managers to divest include industry decline (e.g., Harrigan, 1980); informa-
tion asymmetry vis-à- vis external constituents like securities analysts and investors
(e.g., Zuckerman, 1999; Gilson et al., 2001); hostile takeover attempts (e.g., Bhagat,
Shleifer, and Vishny, 1990; Berger and Ofek, 1999); and regulatory requirements such
as antitrust (Joskow, 2002).
In turn, much of the early literature on divestitures documented that these trans-
actions are beneficial for divesting firms, in terms of operating performance (e.g.,
Hoskisson and Turk, 1990; John and Ofek, 1995; Daley et al., 1997), short- and long-
term stock market performance (e.g., Montgomery, Thomas, and Kamath, 1984;
Hoskisson and Turk, 1990; Comment and Jarrell, 1995; John and Ofek, 1995; Desai
and Jain, 1999), and analyst coverage and forecast accuracy (e.g., Krishnaswami and
Subramaniam, 1999; Zuckerman, 2000; Gilson et al., 2001). These favorable conse-
quences are often portrayed as evidence that divestitures succeed at resolving the
problems that prompted managers to undertake these transactions in the first place.
It is interesting to note that a significant portion of the above-described body of
research is published in finance journals. This at least in part reflects this literature’s
use of divestitures as a context in which to measure the existence and magnitude of
the diversification discount (a topic of significant debate in the late 1990s and early
2000s), in that the value gains resulting from divestitures could be interpreted as ev-
idence of value destruction within the diversified firms that undertook those trans-
actions (Villalonga, 2003). Having said this, much more of the current research on
divestitures is appearing in strategy journals, reflecting a reconceptualization of these
strategies as proactive, forward-looking ways for managers to reshape their bound-
aries rather than as reactive, backward-looking solutions to problems. I discuss this
shift in the next section, emphasizing the point that a key way for strategy scholars
to differentiate their work from that of finance scholars (even though both sets of
researchers often use similar data, measures, and methodological approaches) is to
156 Corporate Strategy
Fourth, and finally, while much current strategy research about divestitures has
taken the perspective of the divesting firm, scholars have also begun examining the
implications of these transactions, especially spinoffs, for the units that are divested.
Within this domain, questions about how divested businesses constitute their boards
of directors (Semadeni and Cannella, 2011; Feldman, 2016a), structure managerial
incentives (Seward and Walsh, 1996; Feldman, 2016b), establish independent iden-
tities (Corley and Gioia, 2004; Wiedner and Mantere, 2019), secure relevant analyst
coverage (Feldman, Gilson, and Villalonga, 2014), and even experience the divesti-
ture process (Moschieri, 2011) have all become paramount.
Future Research
Having surveyed the landscape of past and current divestiture research, it now
becomes possible to articulate my views about the future of research in this domain.
In seeking to address the foundational question of how managers set and oversee the
scope of their firms, I proposed a framework for corporate strategy in Feldman (2020)
that comprises three levels of analysis: intraorganizational, whereby managers must
coordinate relationships and resources within the boundaries of their firms; inter-
organizational, whereby managers must coordinate interactions with other compa-
nies across firm boundaries; and extraorganizational, whereby managers must decide
which businesses belong within the boundaries of their firms and which ones do not.
I structure my discussion of future research on divestitures around these three levels
of analysis.
Intraorganizational
Beginning with an intraorganizational perspective, three key facets of how dives-
titures influence and are influenced by resource allocation within firm boundaries
merit further research attention. The first looks at the firm through the lens of stake-
holder theory. Stakeholder theory holds that the firm lies at the center of a network
of stakeholders (such as customers, employees, suppliers, local communities, share-
holders, and other providers of financial capital) that contribute specialized and
socially complex assets and resources to the firm (Barney, 2018). The issue that im-
mediately becomes apparent from this perspective is that divestitures are likely to
disrupt the ongoing resource contributions of one or more of these stakeholders (es-
pecially employees, who may experience the dislocations resulting from divestitures
most acutely^4 ), with potentially significant consequences for the firm’s ongoing oper-
ations. Bettinazzi and Feldman (2020) began exploring this very point by conceptual-
izing divestitures (and different types of divestitures) as arising endogenously in firms
where those transactions are less costly to stakeholders than the internal resolution of
conflicts among those stakeholders (Klein et al., 2019). Building from this premise,
Restructuring and Divestitures 157
future research could usefully explore when and how divestitures disrupt the contri-
bution and allocation of resources by various stakeholders, as well as the implications
that this has for the anticipation and proactive management of conflicts among stake-
holders, and hence, for firm performance and other outcomes.
A second key direction for future research taking an intraorganizational perspec-
tive on divestitures is to introduce organization design into the mix. With the excep-
tion of only a few prior studies (e.g., Arora, Belenzon, and Rios, 2014), the literatures
on organization design and corporate strategy have largely remained separate from
one another, despite the obvious parallel that the former explores internal boundary
decisions while the latter explores external boundary decisions. As noted in Feldman
and McGrath (2016), modularity is one facet of organization design that could in-
teract with divestitures, particularly in terms of the ease with which divesting firms
may be able to cleave off divested units. For instance, it may be more straightforward
for companies to divest previously acquired rather than internally developed units, to
the extent that the former are less integrated with, and hence, more modular, than the
latter. Another facet of organization design that could interact with divestitures is the
firm’s degree of centralization or decentralization. For example, in a recent working
paper, Eklund and Feldman (2021) show that the degree of centralization of divest-
ing firms’ research and development (R&D) units has significant implications for
the manner in which firms apply the resources that are freed up by divestitures (e.g.,
cash, human resources, physical capital) to future innovation opportunities. Scholars
would be well served to continue mining the rich literature on organization design for
potentially interesting intersections with research on divestitures.
Third, future research could investigate how divesting firms reconfigure existing
resources and processes within their organizations following the completion of
divestitures. These transactions can be enormously disruptive events for firms, and
existing studies have begun to contemplate how divestitures may impel firms to re-
organize internal processes and practices like compensation (Pathak, Hoskisson, and
Johnson, 2014; Feldman, 2016b), capital allocation (Feldman, 2016c), and innovation
(Eklund and Feldman, 2021). A few papers have also begun to consider how dives-
titures might disrupt key interdependences within divesting firms (Feldman, 2014;
Natividad and Rawley, 2016; de Figueiredo, Feldman, and Rawley, 2019), prompting
a reconsideration of where synergistic value is generated within multibusiness firms.
Future research could usefully continue to explore these issues in greater depth.
Interorganizational
From an interorganizational perspective, a key direction for future research about
divestitures is to study how divesting firms manage their post-divestiture relation-
ships with divested businesses. In particular, it would be very valuable to understand
how various resources, processes, capabilities, physical assets, and human cap-
ital are divided between divesting firms and divested businesses, especially because
Restructuring and Divestitures 159
divestitures leads to the accumulation of valuable capabilities and, in turn, better
transaction performance (e.g., Haleblian and Finkelstein, 1999; Bergh and Lim,
2008), it is readily evident that learning and experience may accumulate due to
interactions and relationships between firms as well. Thus, one might consider, for
example, whether firms that have more acquisition experience perform better when
they undertake divestitures (and vice versa), as well as when and why this might or
might not be the case. Further to this point, one could also explore whether and how
interactions with intermediaries like investment bankers, lawyers, and consultants
result in the accumulation of divestiture capabilities, as articulated, for example, in
McGrath’s (2016) dissertation on this topic. These and related ideas raise intriguing
questions about how interorganizational relationships between firms and their inter-
mediaries might influence divestiture decision-making and performance.
Extraorganizational
From an extraorganizational perspective, one important direction for future inquiry
is for scholars to continue to incorporate the insight into their research that divesti-
tures are a key part of the intertemporal process of resource reconfiguration and scope
change. As mentioned previously, the notion of using divestitures sequentially with
other corporate strategy transactions is not new, especially in terms of acquisitions
preceding divestitures (Kaplan and Weisbach, 1992; Teece et al., 1994; Chang, 1996;
Capron et al., 2001; Shimizu and Hitt, 2005; Hayward and Shimizu, 2006; Shimizu,
2007) and divestitures preceding acquisitions (Dranikoff et al., 2002; Bennett and
Feldman, 2017; Vidal and Mitchell, 2018).
Having said this, however, many opportunities remain available to explore this
issue in greater depth. For example, researchers might examine the different con-
figurations of corporate strategy transactions that exist, incorporating acquisitions,
alliances, divestitures, joint ventures, corporate venture capital, and even internal re-
source redeployment (e.g., Feldman and Sakhartov, 2021) and organic growth (e.g.,
Tang and Feldman, 2021) into their analyses. To facilitate this, scholars must embrace
the notion that corporate strategy is a dynamic and holistic process that unfolds over
time and involves series of transactions rather than discrete events (Feldman, 2020),
and they must begin to explicitly conceptualize and model longer-term sequences of
corporate strategy transactions, as a few scholars have begun to do (e.g., Chang, 1996;
Teece et al., 1994; Feldman and Sakhartov, 2021).
Another important research direction from an extraorganizational perspective is
to understand how various internal and external constituents might influence the di-
vestiture decision. Much of the existing literature about divestitures has been built
around the assumption that managers decide to divest or not to divest particular busi-
nesses. Recently, though, some studies have begun to explore how external actors,
such as activist investors (Chen and Feldman, 2018) and securities analysts (Feldman
et al., 2014; Feldman, 2016d), might influence or equally be influenced by these
160 Corporate Strategy
decisions. As an extension of these findings, it would be interesting to understand
how other external constituents—such as the press, social activists, debtholders, and
even other kinds of equity owners—might exert pressure on firms to divest or not to
divest certain businesses, with significant implications for the divesting firms.
Extending this idea a step further, one could even consider the role of internal
constituents along this dimension as well. For example, Feldman et al. (2018) articu-
late that firms may undertake divestitures in response to high pay inequality and its
resulting social comparisons among their employees. Although these authors do not
argue that employees demand divestitures in response to high pay inequality, there
could be situations in which such demands are made in response to some sort of dis-
satisfaction within the organization. Investigating these kinds of questions could be
very interesting, especially in the current business environment where such expres-
sions are becoming increasingly commonplace and where companies are increasingly
responsive to them. This could form an important link to the literature on entrepre-
neurial spin-offs, which explicitly considers the separation of employee-led ventures
into freestanding entities (e.g., Klepper and Sleeper, 2005; Agarwal et al., 2004). There
are obvious parallels between entrepreneurial spin-offs and corporate divestitures,
creating a potentially fascinating opportunity for cross-fertilization across fields of
research.
Last but not least, one final area of inquiry taking an extraorganizational perspec-
tive could be to consider the interplay between divestitures and industry conditions.
A few studies have examined industry divestiture waves, documenting significant in-
dustry clustering of divestiture activity as well as performance consequences deriving
from the point in an industry divestiture wave at which a focal transaction is situ-
ated (Mulherin and Boone, 2000; Brauer and Wiersema, 2012). One could usefully
extend some of these ideas by considering macroeconomic and even social trends
(per the earlier discussion) as significant drivers of divestiture decisions and divest-
iture performance. This leads to an additional possibility, which might be to explore
the implications of divestitures for competition and industry characteristics. For ex-
ample, when one company sells a business unit to another firm that is already in that
line of business, market concentration increases in the industry in which that busi-
ness operates (since the acquiring firm now holds a larger share of the market). It
would be useful to consider the competitive implications of divestitures for different
industries, which would represent an important marriage of the competitive and cor-
porate strategy literatures.
Conclusion
This chapter has reflected on the historical development, current status, and future
trajectory of research on divestitures. Against the backdrop of the central question in
corporate strategy—how do managers set and oversee the boundaries of their firms?—
it is evident that divestitures play as integral a role as the expansionary strategies that
162 Corporate Strategy
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