Bustup Takeovers of Value-Destroying Diversified Firms

The authors examine whether the value loss from diversification affects takeover and breakup probabilities. They estimate diversification's value effect by imputing stand-alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by leveraged buyouts associations, which frequently break up their targets. For a subsample of large diversified targets, higher value losses increase the extent of posttakeover bustup and post-takeover bustup generally results in divested divisions being operated as part of a focused, stand-alone firm.