Refocusing through discontinued operations in response to acquisitions and diversification

We examine how prior acquisitions and the extent of corporate diversification affect decisions to discontinue operations. These choices comprise a very important class of publicly announced disposal decisions, and analyzing them allows us to utilize a much larger sample than most prior studies of divestitures. We employ a multinomial logistic regression setting to test our three hypotheses; this framework allows us to assess the difference in choices regarding positive- and negative-valued announcements of discontinued operations. We find that firms are less liable to report negative-valued divestitures in the year of an acquisition, and are more likely to discontinue operations, especially with negative values, two and three years after. The effects of the size of an acquisition on disposal decisions differ sharply between large and small firms. The magnitude of an acquisition has little influence on subsequent divestiture choices by smaller enterprises. However, large companies are more likely to make positive-valued discontinuations in the year of and year following a major acquisition, which is consistent with the view that valuable but unwanted units are often shed soon after large complex acquisitions. We find strong support for the Corporate Focus Hypothesis, positing that highly diverse firms are more likely to divest assets. We also show that when a company announces its first discontinued operation, this normally follows a period of increasing corporate diversification, and the majority of subsequent disposals take place as intermediate steps in a down-sizing process.