Asset Sales by Claudia Curi & Maurizio Murgia

Author:Claudia Curi & Maurizio Murgia
Language: eng
Format: epub
ISBN: 9783030495732
Publisher: Springer International Publishing

4.2.2.2 Asset and Firm Productivity Change

The efficiency explanation argues that seller assets, when undervalued by the market as a result of inefficiencies in the operating policies and/or organization structure, might be reallocated to higher-valued uses of potential buyers. If the buyer is motivated to acquire the target’s assets because it foresees potential productivity gains and synergies that can be realized from placing the asset’s current use under its own control, then both buyer and seller might obtain potential gains from such transaction. From the seller’s point of view, if part of the improvement is passed on to the selling firm, the seller’s abnormal return should be higher when the division is sold to a related buyer. It follows that the net sale proceeds will exceed the present value of the net future cash flow from continued ownership and operation, and in this case, the asset sale is in the best interest of shareholders.

By using detailed, plant-level data from the Longitudinal Research Database (LRD) compiled by the Census Bureau, Maksimovic and Phillips (2001) track sales of individual plants and benchmark their efficiency against that of other plants in the industry. Their study analyzes (1) the factors associated with the probability that assets transfer ownership and (2) ex ante and ex post changes in productivity for buyers and sellers. Findings related to the first research question show that buyers and sellers are generally large multi-division firms and their probability of selling assets decreases with both the asset’s and the segment’s productivity. However, these firms are more likely to sell peripheral divisions than main divisions. This result stems from operational reasons, according to which peripheral divisions are more likely to be dissynergistic. Moreover, Maksimovic and Phillips (2001) find that the probability of selling assets is higher when the selling firm is less productive and a division is more likely to be divested when its expected performance is poorer compared to other divisions. Findings related to the second question show that ex post productivity changes occur for assets transacted and that these productivity changes are associated with buyer and seller initial productivity and firm organization. Overall, these findings suggest that firms have different capacities to exploit assets, with more skilled buying firms being able to transfer skills and improve the assets they purchase. The market for corporate assets facilitates this redeployment of assets from firms with a lower ability to firms with higher ability.

Warusawitharana (2008) looks at the determinants of asset sales and tests a model in which asset sales (and purchases) enable the transfer of capital from less productive to more productive firms. These transactions occur as part of the overall investment decisions of value-maximizing firms. In this model, the two main determinants are return on assets and size; these determinants strongly influence a firm’s choice to sell (or purchase) existing assets, with less profitable firms finding it optimal to downsize and sell existing assets. A unit standard deviation decrease in return on assets increases the likelihood of an asset sale by 34%.

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