Divestment-Management: Success Factors in the Negotiation Process of a Sell-off

Long Range Planning 45 (2012) 258e276

http://www.elsevier.com/locate/lrp

Divestment-Management: Success Factors in the Negotiation Process of a Sell-off Timo Defren, Bernd W. Wirtz and Sebastian Ullrich

For many companies, divestments represent an important strategic instrument to proactively manage their business portfolios. However, many transactions do not live up to the sellers’ expectations, as most sellers do not succeed in overcoming the information problem of the buyer. Therefore, transactions often result in prolonged negotiations and unexpectedly lower selling prices. Despite its undeniable importance, there is little empirical research that focuses on the conceptualization and operationalization of success factors in the negotiation process of a sell-off and the performance impact of these success factors. This article, therefore, analyzes the information problem between the seller and the buyer of a business unit in a sell-off. Critical success factors to overcome the information problem are theoretically conceptualized and operationalized, and their performance impact on divestment success is examined. Based on a survey of 251 companies and using structural equation modeling, we show that five of six theoretically derived success factors have a significant positive effect on divestment success. Particularly, the information quality of the due diligence and the credibility of communication activities have strong performance impacts. The article closes with managerial implications derived from the empirical analysis and directions for possible future research. Ó 2012 Elsevier Ltd. All rights reserved.

Introduction According to US market data, companies rarely conducted any divestments until 1965. This behavior changed in the beginning of the following decade when almost 2000 divestments occurred annually. After a drop to approximately 500 divestments in 1980, sales of business units constantly increased over the next two decades, reaching 3000 divestments in 2000. Since then, the numbers have remained high, while the volatility levels have remained relatively low (Weiher, 2008). Despite the high numbers of divestments and the growing importance of divestments in the context of strategic management, attention to this subject in the academic research is surprisingly low. Although 0024-6301/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.lrp.2012.02.006

mergers and acquisitions have been researched widely (Achleitner and Wahl, 2008), divestments have often had a negative connotation and have been associated with a financial crisis of the company. However, this perspective has changed as the term divestment has evolved from a financial option to raise funds or respond to internal problems to a strategic option for the proactive management of the business portfolio. In general, companies divest business units for both internal and external reasons. Internal motives include a focus on core competencies, the goal to obtain a more efficient market valuation, the termination of capital-intensive growth or an increase in liquidity. External motives include the declining markets, cost advantages of competitors, antitrust enforced decisions, privatization and increasing substitute offers (Cumming and Mallie, 1999). If a company finally decides to divest a business unit, one goal is to maximize divestment success. However, many announced transactions either fail during negotiations or result in prolonged negotiation processes. In many cases, neither the seller nor the buyer can agree on an appropriate selling price. This disagreement is a result of existing information asymmetries and conflicts of interest between the parties involved. Both situations lead to uncertainties, especially for the buyer. This uncertainty is further strengthened by potential opportunistic behavior by the seller and the (occasionally) difficult assessment of the quality of the divestment object. This interrelationship, defined as the information problem, presents the core problem of negotiations between the seller and the buyer and can have a negative impact on divestment success. The contributions of this article are twofold. First, a multidimensional framework of success factors to overcome the information problem between a seller and buyer in a sell-off is conceptualized on the basis of a multi-theoretical framework and empirically validated. The success factors aim to reduce, specifically, the information problem of the buyer, however, with a clear focus on the divestment success of the seller. This leads to the second contribution. The impact of the success factors on divestment performance is examined. The empirical analysis is based on a survey of 251 companies that have sold a business unit in prior years. This article is organized as follows. After an introductory definition of the central terms of this study, the research framework including the success factors to overcome the information problem and the concept of divestment success are developed. Overall, seven hypotheses are derived and empirically analyzed. The results, including the assessment of the individual factors, the model and the impact on divestment success, will then be explained. The article closes with the implications for management and with possible research questions for academics.

Concept of divestment and information problem In business research and management, the concept of “divestment“ is applied, to some extent, differently and inconsistently. Due to the various concepts, it is necessary to define divestment in the underlying context to specify the relevant divestment object. Basically a divestment is the counterpart to an investment, that is, the recovery of the funds that are tied up in an asset (L€ offler, 2001). However, this definition is too broad, as potential divestment objects would encompass both individual economic goods and entire companies. With regard to the core problem of this article, as well as the relevant literature, a narrower view is taken to define a divestment as follows: Divestment decisions are met on a voluntary basis (Br€ uggerhoff, 1992). Therefore, divestments due to hostile bids are not considered. Furthermore, the seller must have at least a 50% stake in the business unit before the transaction so that a controlling position over the divestment object and an information advantage are assumed. After the transaction, the stake must be reduced to a level such that the seller has no more control over the business unit (Jansen, 1986). Objects that are not of vital business interest to the seller are also ignored. Relevant business units include, for example, divisions, branches, subsidiaries, sub-holdings, profit centers and areas of activities such as marketing and R&D (Rechsteiner, 1994). Moreover, the business unit is required to be to an external buyer through a sell-off. Consequently, the sale to the management (MBO), the employees (EBO) or the shareholders (spin-off or split-off) is excluded, as these groups of potential Long Range Planning, vol 45

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buyers are well informed about the company’s business and generally dispose of relevant and valuation related information. Therefore, the reduction of the information problem is not a major issue for this group of buyers. IPOs, liquidations and shutdowns are also not considered (Dohm, 1988). To summarize, “A divestment is a voluntary sell-off to an external buyer of a former fully controlled business unit of vital interest to the seller.” The information problem between the seller and the buyer of a business unit is the core problem of this article. With respect to the conceptualization of the success factors, it is, therefore, essential to clarify the major components of this concept. In general, the information problem is a “cause and effect” relationship. The cause refers to the information asymmetries between the seller and the buyer. These asymmetries finally lead to uncertainties that have an effect on the decision behavior of the buyer. To overcome the information problem, the seller can take measures on both the cause and the effect side. Information asymmetries are present if relevant facts on the quality of the divestment object and the behavior of the parties are not evenly distributed at all times. Information asymmetries can be ascribed to the asymmetric access to information and the opportunity costs of an information search. Depending on when information asymmetries are present, asymmetries before and after the signing of a contract are distinguished (Wirtz, 2003). In this context, ex-ante information asymmetries are mainly relevant. The two types of ex-ante information asymmetries are defined as “hidden characteristics” and “hidden information”. The first type is highly pertinent to this paper because the buyer may not consider all valuation-related characteristics of the divestment object and may thus miscalculate the quality of the object. Hidden information also plays a major role because the buyer does not have all relevant information at his disposal before finalizing the contract. Thus, the buyer cannot rule out that the seller withholds important facts or even intentionally disseminates false information. Both types of ex-ante information asymmetries result in uncertainties concerning the quality of the offered business unit and increase the buyer’s perceived risk of taking over an inappropriate object. This can trigger a process of systematic market failure, the so-called adverse selection. Consequently, the seller of a business unit with above-average quality is particularly interested in overcoming the information problem and eventually achieving an above-average selling price (Picot, 2003).

Literature review The research field is classified in two major categories. The first category comprises studies that explicitly analyze information problems between sellers and buyers in financial markets, that is, the market for M&A, IPO and bonds. This category is closely related to the underlying problem of this study. The second category comprises studies dealing with the information problem in a more general, seller-buyer relationship. This category differs from the specific seller-buyer relationship in a sell-off, but it still provides clues regarding critical success factors. The first category mainly analyzes single factors to overcome an information problem. A complementary study that integrates various factors and empirically tests is not existent. Moreover, most studies do not base their analysis on a theoretical foundation. Despite the important meaning of the information problem in the context of a divestment, it is remarkable that only a few studies have analyzed potential methods on how to overcome the information problem in a sell-off. The second category offers further hints on potential factors that may apply to the solution of the information problem in a sell-off. However, this category also lacks an integrated, theoretically sound and empirically sophisticated study (Sengupta, 1998). To summarize, a review of the literature reveals the need for additional studies. A holistic conceptualization and operationalization of success factors to overcome the information problem in a sell-off is not existent as previous surveys basically address single aspects that are analyzed independent of each other or analyzed on a case study basis. On a large scale, many studies are statistically evaluated on the basis of secondary data or provide results that are difficult to generalize. 260

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There is, in particular, a deficit in studies that fall back on primary data. Furthermore, there is a lack of well-founded theoretical studies, and only a few articles are based on selected theories of the new economics of institutions. Recapitulating, there is a shortcoming of theoretically founded, empirical, confirmatory surveys that analyze the effects of critical success factors on divestment performance.

Research framework Conceptualization of success factors The overall research framework addresses the previously mentioned research gap. Its goal is to identify critical success factors to overcome the information problem in a sell-off and to assess the performance impact on divestment success. The conceptualization falls back on the theoretical basis of principal-agent-theory, transaction cost theory and information economics. Based on these three broad theoretical approaches, a holistic framework of relevant overriding factors can be identified to specifically derive critical success factors to overcome the information problem during a divestment. The conceptualization procedure of the six success factors is summarized in Figure 1 and will be explained in more detail in the following section, drawing on the relevant literature and on interviews with top-level managers. Within the context of principal-agent-theory, signaling plays a major role in the reduction of exante information asymmetries. By sending out credible signals, the seller can counteract the risk of adverse selection. Three major types of signals are repeatedly mentioned in literature with regard to the specific information problem in a sell-off, namely, reputation, information and warranty. These signals are applied to deduct relevant success factors (Cohen and Dean, 2005). The reputation of a vendor results from specific behavioral patterns in the past and is used by the uninformed party as an indicator for future behavior. As reputation is a value that is built up over an extensive period, its owner is highly concerned with preserve his reputation through appropriate behavioral patterns. Building up and preserving reputation involves costly time and effort serving as a type of deposit to the uninformed principal. Applied to the context of a sell-off, a potential buyer is assumed to largely assess the quality of the divestment by the reputation of the seller. The seller’s reputation across the M&A market arises from past divestments and is often revealed through publicly available information (Schiereck and Stienemann, 2004). If, for example, complaints from former transaction partners are unveiled, negative effects such as price reductions or prolonged negotiations are likely. In summary, a solid divestment-based reputation of the seller will reduce the buyer’s uncertainty and, hence, increase the seller’s divestment success.

Principal-agenttheory

Reputation

Transaction cost theory

Information

Divestment-based Reputation of the reputation of the divestment seller advisor

Warranty

Information quality of the due diligence

Information economics

Ex-ante transaction cost

Quality of warranties

Openness of communication

Trust

Credibility of communication activities

Success factors to overcome the information problem in a sell-off

Figure 1. Conceptualization of the six success factors for overcoming the information problem Long Range Planning, vol 45

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H1: A solid divestment-based reputation of the seller increases the seller’s divestment success. Another success factor, derived from the reputation signal, is the reputation of the divestment advisor mandated by the seller. This factor helps to reveal the quality of the divestment object as it serves as an official certification (Booth, 2004). To preserve his reputation in the long term and obtain future mandates, the advisor seeks to evaluate the quality of the seller at fair value. At the same time, highly reputable advisors are normally able to charge higher fees (Moore and Ronen, 1990). Therefore, from an economical perspective, the activation of a reputable divestment advisor is only rational if the seller is able to recoup higher fees by a better selling price (Helou and Park, 2001). To summarize, the reputation of the divestment advisor reduces the buyer’s uncertainty regarding the quality of the divestment object and positively impacts the divestment success of the sellers. H2: A solid reputation of the divestment advisor increases the seller’s divestment success. The transmission and provision of information represent an important signal with regard to reducing the information problem. In general, disseminating information is a direct means to reduce information asymmetries as such dissemination narrows the information gap of the uninformed party. In the context of a sell-off, the information quality of the due diligence is a critical signal for overcoming the information asymmetries during a divestment. The signaling effect of a due diligence is significantly determined by the quality of the available information (Ragotzky, 2003). However, the quality is largely correlated with the resources assigned to the information processing and the provisions on the selling side. Therefore, only a seller aiming at a higher price for the divestment will commit more resources to provide high quality due diligence to reduce the information asymmetries. H3: A high information quality of the due diligence positively influences the seller’s divestment success. Granting warranties is an additional option to signal the quality of a product to a buyer (Gallouj, 1997). Warranties are particularly suitable in the context of one-time purchases or of purchases with longer periods in between. Both types of transactions normally apply to the selling of a business unit. As warranties imply costs and risks to the seller, granting extensive warranties is only reasonable to a vendor of a high quality divestment if he does not expect the buyer to file a claim (Roden and Bassler, 1996). Consequently, fewer claims will result in fewer expenses compared to a vendor of a bad quality divestment (Shimp and Bearden, 1982). Therefore, the seller of a business unit can distinguish himself from other sellers by the quality of granted warranties. Quality, in this respect, is mostly defined through the length and scope of the warranty. In summary, the quality of warranties reduces the buyer’s uncertainty and increases the seller’s divestment success. H4: The quality of warranties positively influences the seller’s divestment success. Although some corporations have large-scale divestment programs, many companies only divest on an irregular and sporadic basis. The frequency of carried-out divestments should be considered when choosing the most efficient transaction mode. Transaction cost theory offers direction by describing the efficiency of transactions depending on incurred transaction costs. According to the level of transaction costs, it can be advantageous for a company to carry out a transaction either internally or externally. In the context of a sell-off, it is favorable to execute the transaction through an external market. In this situation, the standard law of contract is the most efficient type of contract as the major part of the transaction costs relates to ex-ante costs (largely information and communication costs). Because the buyer factors the ex-ante costs into his decision-making, the 262

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seller needs to reduce these costs. The communication and information activities of the seller play a major role in this context. Through open communication, the seller reduces potential ex-ante costs of the buyer and lowers information asymmetries. As a consequence, the openness of communication helps the buyer overcome the information problem, which should, therefore, contribute to the seller’s divestment success (Stahl et al., 2004). H5: The overall openness of communication during the sell-off positively influences the seller’s divestment success. Finally, drawing on information economics, three types of goods e search, experience and credence goods e are distinguished. The goods differ by levels of information asymmetry and uncertainty with increasing levels from search to credence goods. It is assumed that a divestment object contains plenty of experience and credence characteristics, thus resulting in high quality uncertainties and information costs. From an information economics point of view, a seller can reduce uncertainties of a buyer by building trust. Therefore, trust building measures are crucial in the context of M&A transactions with respect to reducing information costs. This can be achieved by the credibility of communication activities. Potential buyers are more willing to sign a contract if they believe in the statements of the seller. Hence, the credibility of communication activities represents another success factor for reducing the information problem and increasing the seller’s success of the overall divestment (Xue, 2005). H6: The overall credibility of communication activities during the sell-off positively influences the seller’s divestment success. Summing up the proposed research model, four success factors were derived from the principalagent-theory, more precisely from the underlying concepts of reputation, information and warranties. Another success factor was largely conceptualized by means of transaction cost theory and the ex-ante costs related to a divestment. Finally, another success factor was identified due to the nature of the divestment object in the area of information economies. Altogether, six success factors are suggested for reducing the information problem of the buyer and increasing the divestment success of the seller. Conceptualization of divestment success and performance impact of success factors Divestment success in the negotiation context is conceptualized as a multidimensional construct. Based on theoretical considerations, interviews and literature, divestment success comprises three dimensions, that is, selling price, speed of negotiations and transaction certainty. The achievement of a high selling price is a fundamental goal of the seller. The success of a divestment is often measured by this criterion, as it is an objective and publically available indicator (Schmitz-Valckenberg, 2003). Another goal of the seller is a smooth and efficient negotiation process. Because resources are tied-up and the underlying operating business is interrupted during negotiations, a quick process helps save costs associated with lengthy negotiations (B€ ollhoff et al., 2007). During interviews with top-level managers, a third goal for a selling company during a divestment became apparent, namely, transaction certainty. Transaction certainty mainly refers to three aspects. First, the seller wants to be certain that the buyer will pay a specific price. Second, he wants to foresee approximately when negotiations will be finalized. Third, he wants to be certain that the entire business unit, not just parts of it, is sold (Wright and Robbie, 1996). In this study, the success factors were conceptualized to reduce the information problem, that is, to minimize either information asymmetries or uncertainties regarding the quality of the divestment object. This understanding allows for an empirical analysis of the relationship between the success factors and divestment success. The basic hypothesis is that the conceptualized success factors have a positive performance impact on divestment success. The level of the selling price, among Long Range Planning, vol 45

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other factors, is determined by the perceived uncertainty of the buyer. High uncertainties mostly lead to price discounts. A seller who manages to reduce these uncertainties by means of the success factors should, therefore, benefit from higher selling prices. A similar relationship should apply to the speed of negotiations. As the buyer is only willing to sign a contract if he disposes of sufficient information on the quality of the divestment object, the success factors should accelerate the negotiation process. Furthermore, it is assumed that transaction certainty increases when information asymmetries and quality uncertainties are reduced. Our last hypothesis is summarized as follows: H7: Divestment success can be conceptualized as a second-order construct with three first-order dimensions, selling price, speed of negotiations and transaction certainty, which have a positive performance impact on divestment success. To understand the outlined conceptualization in more depth and to provide a critical view on the importance of the selected success factors, one of the most well-known examples, the divestment of Chrysler by Daimler, is subsequently described Case 1.

Empirical study The main research goal of the empirical study was to measure the latent constructs of the research model in a sample of companies having divested a business unit and to explore the relationship between the latent success factors and the construct of divestment success. Such a goal, in turn, requires a strong analytical tool to assess all the relationships of the latent variables in one coherent

The TheCase Caseof ofDaimlerChrysler DaimlerChrysler One of the globally most famous examples of a divestment is the DaimlerChrysler case. One of the globally most famous examples of a divestment is the DaimlerChrysler DaimlerChry r sler case. The DaimlerChrysler AG was established in 1998 with the aim to provide a global The DaimlerChrysler AG was established in 1998 with the aim to provide a global distribution network and to achieve economies of scale and scope to become one of the distribution network and to achieve economies of scale and scope to become one of the largest companies worldwide. The German Daimler-Benz AG and the American Chrysler largest companies worldwide. The German Daimler-Benz AG and the American Chrysler Corporation merged as equal partners, however, shortly after the merger was completed Corporation merged as equal partners, however, shortly after afte f r the merger was completed the German influence on the company was increasing. the German influence on the company was increasing. Unfortunately, the envisioned benefits of the merger never became true and in 2007 the Unfortunately, the envisioned benefits of the merger never became true and in 2007 the company announced that it is considering all options for Chrysler. DaimlerChrysler company announced that it is considering all options for Chry r sler. DaimlerChrysler Chrysler. presented a restructuring plan to bring Chrysler back on track and make the company presented a restructuring plan to bring Chrysler back on track and make the company profitable again. Shortly after, however, DaimlerChrysler opened a bidding process for profitable again. Shortly after, aft f er, however, DaimlerChrysler opened a bidding process fo fforr Chrysler and therewith officially stated a divestment. Chrysler and therewith off f icially stated a divestment. officially Four companies showed interest to buy Chrysler; the American investment companies Four companies showed interest to buy Chrysler; the American investment companies Blackstone and Cerberus Capital Management, the Austrian-Canadian component Blackstone and Cerberus Capital Management, the Austrian-Canadian component supplier Magna International as well as the American billionaire investor Kirk Kerkorian. supplier Magna International as well as the American billionaire investor Kirk Kerkorian. In May 2007 DaimlerChrysler announced that Cerberus Capital Management won the In May 2007 DaimlerChry r sler announced that Cerberus Capital Management won the DaimlerChrysler bidding and that 80.1 percent of the new company Chrysler LLC will be hold by Cerberus bidding and that 80.1 percent of the new companyy Chrysler Chrysler LLC will be hold by Cerberus Capital Management – 19.9 percent of the shares remained with Daimler. Capital Management – 19.9 percent off the the shares remained with Daimler. During and after the bidding process it became obvious that the communication between During and after aft f er the bidding process it became obvious that the communication between the involved parties was hindering the divestment success massively. On top, the involved parties was hindering the divestment success massively. On top, speculations about inadequate due diligence and mismanagement were put forward by speculations about inadequate due diligence and mismanagement were put forward f rward by for Cerberus. Furthermore, Daimler accepted a broad range of cuts on the selling price to Cerberus. Furthermore, Daimler accepted a bro r ad range of cuts on the selling price to broad eventually divest Chrysler. Only by giving warranties for the retirement and health care of eventually divest Chrysler. Only by giving warranties for f r the retirement and health care of fo Chrysler employees Cerberus finally agreed on the deal. Chry r sler employees Cerberus finally agreed on the deal. Chrysler In summary, even though Daimler AG claimed to have provided all information In summary, r even though Daimler AG claimed to have provided all info f rmation information necessary to Cerberus and by giving substantial warranties the divestment has not yet necessary r to Cerberus and by giving substantial warranties the divestmentt h as not yet has been a success to Daimler. The final outcomes as well as the detailed financial impact been a success to Daimler. The final outcomes as well as the detailed financial impact on Daimler can only be estimated by now. on Daimler can only be estimated by now.

Case 1. The DaimlerChrysler Case 264

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model. Structure equation modeling has proven to be an adequate analytical tool in social science for combining the use of latent factors and constructs, as well as multiple relationships, in a single research model. Sampling frame Data were collected by means of a survey questionnaire that was sent to senior executives in divesting companies. It was assumed that response from a top-level executive would be a good proxy. Both members of the board (not members of the supervisory board) and other employees in leading positions in the area of M&A, corporate development or corporate finance were considered to be appropriate as key respondents. A list of relevant companies was acquired from a renowned M&A database called “ZEPHYR”. This database contains extensive data on acquisitions and divestments in the European and US markets. Several selection criteria were applied to obtain a relevant set of companies. Although the divesting companies were German, the acquirer could either be a German or a foreign company. Transactions had to occur for at least half a year but not more than five years before the survey. Because the survey was conducted between August and October 2007, divestments between the end of 2002 and the beginning of 2007 were considered. The stake of the seller in the divested business unit had to be at least 50% before the transaction and be reduced to at least a minority stake after the transaction. Moreover, management buy-outs, employee buy-outs, spin-offs and split-offs were rejected. Based on these selection criteria and after eliminating some irrelevant datasets, a sample of 1,457 companies with 2,034 transactions were extracted from the database and finally used for the empirical analysis. Data collection A structured survey questionnaire was developed in multiple stages including different pretests (for details see Appendix A). The main study comprised 1,287 companies that were contacted by e-mail or by phone. The relevant key informant could participate in the survey by e-mail, fax, or on-line. After two reminder rounds, a total of 251 usable questionnaires were obtained, yielding a response rate of approximately 20%. Respondents were mostly senior-level executives, with members of the board accounting for 17% percent and other employees in lead positions accounting for 50%, while 26% were employees in one of the above-mentioned areas. Furthermore, the data were tested for several systematic biases such as the non-response bias, web-survey bias, key informant bias, social desirability bias and common method bias. According to the specific bias, the sample was split into two groups and a t-test was then applied. No significant differences between the groups were found, indicating the absence of bias (Podsakoff and Organ, 1986). With regard to characteristics of the selling companies, the data showed that large companies with more than 5,000 employees accounted for approximately 42% of all surveyed companies. This leaves 21% of the companies with 1000 to 5000 employees and approximately 37% with fewer than 1000 employees. The data on the divested business unit revealed that companies in the IT and telecommunication (32%), financial (17%), pharmacological (16%) and engineering (12%) industries predominated. The average sales volume of the divested objected reached 100 million euros.

Analysis and results The conceptualization and performance implications of the success factors to overcome the information problem in a sell-off were analyzed using structural equation modeling (see Appendix B for details of the analysis). The model was analyzed in three stages: (a) assessment of the reliability and validity of the individual factors, (b) assessment of the reliability and validity of the total model and (c) assessment of the effect on divestment success. Accordingly, items were identified and analyzed by criteria of the first and second generations. After eliminating a few items, the remaining items demonstrated strong reliability and validity. Regarding the assessment of the reliability and validity of the total model, different analyses on the six success factors and three dimensions of divestment Long Range Planning, vol 45

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Divestment-based reputation of the seller

Selling price

Reputation of the divestment advisor

Information quality of the due diligence Divestment Success

Speed of negotiations

Quality of warranties

Openness of communication

Transaction certainty

Credibility of communication activities

Figure 2. Research model

success were conducted. Local and global fit criteria were met and showed that there are, indeed, six success factors for overcoming the information problem and that divestment success is a threedimensional construct. The positive performance impact of the success factors on divestment success was proven for five factors. Surprisingly, the reputation of the divestment advisor evidenced no significant effect. Therefore, from the set of seven hypotheses, only H2 was rejected based on the analysis of this study. Regarding the relative significance of the success factors, the information quality of the due diligence proved to have the strongest impact on divestment success, followed by the credibility of communication activities, divestment-based reputation of the seller, openness of communication and quality of warranties. The underlying research model is shown in Figure 2.

Conclusion The basic assumption of this article was that the negotiation process in the context of a sell-off is critical to the success of a divestment. It shows that many divestments are cancelled at this stage because both parties, the seller and the buyer of a business unit, cannot agree on a selling price. A major reason for this is the existence of an information problem between the seller and the buyer. The information problem was defined as a “cause and effect” relationship, as both information asymmetries and conflicts of interest can eventually lead to quality uncertainties of the buyer with respect to the underlying divestment object. To prevent negative consequences, such as prolonged negotiations or low selling prices, a major goal of the seller is the reduction of the information problem. Drawing upon established theories of new institution economics, a holistic framework of success factors to overcome the information problem was developed that encompassed the six factors identified as the divestment-based reputation of the seller, reputation of the divestment advisor, information quality of the due diligence, quality of warranties, openness of communication and credibility of communication activities. Based on a large-scale empirical analysis of divesting companies, the success factors and their performance impact were validated. Five out of six success factors proved to have a significant positive effect on divestment success, and the information quality of the due diligence and the credibility of communication activities showed the strongest performance impact. We explain the high relevance of these two factors as follows: The information quality of the due diligence is a direct means of the seller to provide the buyer with adequate, customized and relevant data to mitigate the transaction 266

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risk. The various forms of due diligence (e.g., legal, financial, commercial or operations) are widely used by buyers to assess the risks related to the transaction and play a key role within the transaction process. Because not all uncertainties are eliminated by the provision of information in the context of M&A and because a business unit can be considered as a good with high credibility attributes, building trust between the negotiation parties is extremely essential during the negotiation process. Therefore, we understand the high empirical relevance of the credibility of communication activities as a trust-building factor. The rejected hypothesis related to the reputation of the divestment advisor does not imply that the advisor does not have a signaling role. We assume that the advisor’s role is very context driven. Therefore, an advisor may be more important in the context of strong information problems. Information problems are generally stronger if the divestment object is complex, if the environment is uncertain or if the buyer and seller operate in different industries. Consequently, a context-based analysis could provide more evidence for the advisor’s role in mitigating the information problem. The results reveal that by lowering the information problem the seller can positively influence divestment success resulting in higher selling prices, faster negotiation processes and higher transaction certainty. The success factors should not be considered as individual measures but rather as a whole, and applying them systematically, at large, has the greatest impact. Thus, this paper supports the hypothesis that principal-agent-theory, transaction cost theory and information economics are complementary rather than exclusive. Consequently, companies should take all significant success factors simultaneously into account when negotiating with a buyer in a sell-off. In the following, managerial implications as well as research related implications are presented in greater detail. Managerial implications Several implications can be drawn for the management of a divestment. The application of the right measures to overcome the information problem during a sell-off has a significant impact on performance. The empirical study shows that the interactions of five factors strongly contribute to divestment success. Additionally, the method applied allows for the prioritization of the success factors included in the research model. The study provides management with recommendations on how to act in a sell-off. Considering the great relevance of the due diligence as an information tool, the seller should especially focus on the information quality of the presented data. The data should be coordinated with relevant departments and presented in a structured and complementary way, thus allowing the buyer to satisfy his information need efficiently and effectively. Moreover, the seller should make sure that his communication activities are credible. That is, his statements must be consistent and non-contradictory. With this rather soft factor, the seller ensures a more comfortable negotiation process as a level of trust to work more cooperatively during the transaction is established. In fact, both of these crucial success factors will further strengthen the relationship between the seller and the buyer and develop a mutual understanding of the divestment. As to divestment-based reputation, the seller must emphasize developing a good reputation through excellent behavior in (past) transactions. Negative headlines or ex-post complaints from the buyer side must be prevented as being considered a professional and reliable transaction partner is vital to creating and preserving a good reputation. To lower transaction costs of the buyer, which mainly consist of information and communication costs, the seller must communicate openly with the buyer. This rather soft factor implies that the seller should answer inquiries comprehensively and in detail, and new facts pertinent to the divestment object should be revealed immediately. Overall, the seller must communicate proactively because a short-sighted communication policy may not meet the buyer’s information demand. Regarding the quality of warranties, the seller is advised to provide the buyer with adequate warranties. Even though the seller is not suggested to fulfill all of the buyer’s demands, the scope and durability of the warranties should be adequately stipulated to reflect the quality of the underlying object. Thus, a seller can distinguish himself from vendors of below-average quality. Long Range Planning, vol 45

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In summary, the conceptualized success factors in the negotiation process of a sell-off serve as a basis for an overall management framework. Following the empirically verified sequence of the factors’ impact on divestment success, this framework can be used as a means to manage the negotiation process. In doing so, the framework may help executives prioritize and allocate resources so that the divestment results in success for both the seller and the buyer. Future research Although a considerable number of studies have addressed specific information problems in certain research areas thus far, this article is the first comprehensive, confirmatory research contribution in the area of information problems in a sell-off. From a conceptual and empirical point of view, this paper is a starting point for future research. Methodologically, the empirical results show the high applicability of structural equation modeling for the underlying research area. The reliability and validity of the various factors was extensively tested and the relationship between independent and dependent factors was explored. From a theoretical perspective, the applied theories prove to be adequate for the underlying topic and should be applied more intensively in future studies. Although success factors were extensively considered and conceptualized, the results are subject to certain restrictions. Due to a broad research approach, the derived success factors are rather general than sophisticated. Therefore, future research should take individual factors and analyze them in more detail. Moreover, the reputation of the divestment advisor should entail further research as this success factor showed no significant performance impact. Considering the proven performance impact of the advisor in IPO-research, it is recommended that the effects of the divestment advisor in specific contexts be analyzed. To generalize the empirical results, replication studies should be conducted. Cross-validation through further surveys would support the findings of this article and rule out any coincidental results. Because only German companies were surveyed, future research should extend surveys to other countries and test the applicability of the success factors. Replication studies could also be conducted in certain sectors to conclude if there are any sector-specific results. Finally, because some surveyed companies sold their business unit up to five years before the questioning took place, there are some concerns about a potential retrospective bias in the data. However, it also holds that during a divestment process, information is generally treated confidential and sensitive. Although little information is given to the public shortly after the divestment takes place, it would be of great interest to survey companies during or shortly after a divestment. Divestment success, encompassing three major dimensions, was conceptualized as the dependent variable. Although this construct is appropriate in the specific context, it is of interest if there is any further effect on overall business performance. Due to the growing importance of divestments, it is assumed that divestment success may have an impact on business performance. Therefore, future studies should further analyze this relationship.

Appendix A. Instrument development First, multi-item scales were developed by means of research on the constructs of interest. When existing scales did not exist, new measures were created on the basis of literature, theoretical considerations and expert interviews. Second, 16 personal, semi-structured interviews were conducted with both top-level executives and researchers in the M&A area. Interview partners were asked to assess items according to their understandability, meaningfulness and validity. If necessary, partners were asked to indicate which items should be eliminated or added. Based on the interviews, some changes were made to the measurement scales. Third, 18 academic and practical experts were asked to take participate in an item-sorting test suggested by Anderson and Gerbing (Anderson and Gerbing, 1991). According to this test, two indices e the proportion of substantive agreement and the substantive validity coefficient e were calculated. Based on their performance on this item-sorting test, some items were rephrased or eliminated. 268

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Fourthly, another pretest with 170 randomly chosen companies from the sampling frame was conducted. This test aimed to examine the reliability and validity of the remaining items, and it served as a test run for the main survey. All items were assigned to different topics and measured using a seven-point Likert-scale ranging from “strongly disagree” (1) to “strongly agree” (7). Senior executives of the 170 companies were contacted by phone or e-mail and asked to complete the preliminary questionnaire. Based on 26 responses, scale reliabilities (Cronbach’s alpha) and item-tototal correlations were computed, and an exploratory factor analysis was performed (Bagozzi, 1994). After making some modest changes to the items, the measurement instrument was finalized.

Appendix B. Analysis of the research model The statistics were computed by means of the software packages SPSS 15.0 and EQS 6.1, using the maximum-likelihood method (MLM) for the estimation of parameters. The research model was analyzed in three stages: (a) assessment of the reliability and validity of the individual factors, (b) assessment of the reliability and validity of the total model, and (c) assessment of the effect on divestment success. Assessment of the individual factors To evaluate the measurement model, the six success factors and the three dimensions of the divestment performance construct were analyzed. At first, Cronbach’s alpha, item-to-total correlation, variance explained (exploratory), item reliability (confirmatory), composite reliability and average variance extracted were calculated (Churchill, 1979). The threshold values were based on different criteria suggested by Bagozzi and Yi, Bagozzi, Yi, and Phillips and Anderson and Gerbing (Bagozzi and Yi, 1988b). In accordance with Anderson and Gerbing’s suggestion for purifying the measurement model, some items had to be excluded (Anderson and Gerbing, 1988). The remaining items showed strong reliability and validity (for details see Table 1) Assessment of the total model To further evaluate the measurement model, supplementary tests were performed. An exploratory factor analysis was conducted first with the remaining 28 items of the six success factors and, thereafter, with the eleven items of the three dimensions of divestment performance. Both analyses identified the proposed structures. The results of a first-order confirmatory factor analysis additionally proved that both the assumed dimensionality and the assignment of the items to the various factors were reflected in the data (Bagozzi and Yi, 1988a). Subsequently, the criterion suggested by Fornell and Larcker was employed to assess discriminant validity. In doing so, the average variance (extracted by the measure of each factor) and the squared correlation (among measures of that factor and the other factors of the model) were compared (Fornell and Larcker, 1981). All factors fulfilled this criterion. Finally, a second-order confirmatory factors analysis was performed on the construct of divestment success to analyze if the identified dimensions are, indeed, constituents of this construct. Divestment success was conceptualized as a second-order construct with three first-order dimensions. According to the factor loadings, all dimensions proved to load significantly on the second-order factor. Furthermore, a good fit of the model was confirmed based on the excellent values of global criteria (see Figure 3). Assessment of the effect on divestment success A simultaneous analysis of the performance impact of the six success factors was conducted to consider potential interaction effects between single factors. This procedure is based on the assumption that all factors should be regarded in an overall context. The impact of the success factors on divestment performance was analyzed employing structural equation modeling. In this model, the importance of each success factor concerning divestment performance is represented by the factor loading of the individual factor. The higher the factor loading, the more important is the impact of Long Range Planning, vol 45

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Table 1. Reliability and validity of the single factors

Factor/Dimension

Item

Item-to-TotalCorrelation

Cronbach Alpha

Item Reliability (confirmatory)

Composite Reliability

Average Variance Extracted

Divestment-based reputation of the seller

Number of negative headlines related to past sell-offs Public opinion of buyers on the seller Number of subsequent claims of buyers in past sell-offs Sellers’s reputation for the professional execution of a sell-off Seller’s reputation to be a reliable transaction partner Advisor’s reputation to be a reliable partner Advisor’s reputation for his vast industry knowledge Advisor’s reputation in the overall M&A-market Sellers’s reputation for the professional execution of a sell-off Number of successfully executed M&A transactions Recommendation of the advisors Coordination of the data with relevant departments Relevance of the data to the buyer Completeness of the data Degree of subsequent amendments regarding the data

0.609

0.852

0.443

0.854

0.542

0.900

0.604

0.923

0.708

Reputation of the divestment advisor

Divestment-Management

Information quality of the due diligence

0.675

0.545

0.672

0.548

0.716

0.636

0.664

0.539

0.710

0.897

0.574

0.768

0.669

0.783

0.693

0.775

0.694

0.729

0.595

0.568

0.360

0.827 0.834 0.780 0.778

0.923

0.780 0.791 0.654 0.643

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Quality of warranties

Openness of communication

2012

Credibility of communication activities

Selling Price

Speed of negotiations

Structured preparation of the data Legal claims related to the period before the sell-off Appropriateness of the durability Claims of tax liabilities related to the period before the sell-off Detailed and comprehensive answers to buyer’s requests Immediate notification of news regarding the divestment object Degree of proactive communication Degree of open communication Non-contrariness of seller’s statements Extent to which the buyer believed in the seller’s statements Credibility of seller’s statements Consistency of seller’s statements Correctness of the storyline Transaction multiples Selling price within or above seller’s price expectations Maximization of the selling price Premium of the selling price Risk of breaking off of negotiations Fulfillment of negotiation schedule Problems during negotiations that would delayed the process Completion of negotiations within the agreed period

0.780 0.633

0.655 0.789

0.706 0.556 0.711

0.546

0.841

0.666 0.691

0.603 0.666 0.738 0.718

0.424 0.523 0.667 0.629

0.860 0.841 0.852 0.836 0.870 0.856

0.571

0.842

0.573

0.873

0.581

0.928

0.764

0.939

0.794

0.778 0.391

0.721

0.634 0.725 0.683 0.785 0.852

0.796

0.872

0.929

0.938

0.464 0.602 0.535 0.662 0.811 0.830 0.733 0.791 0.756 0.829 0.792

(continued on next page)

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Table 1 (continued)

Factor/Dimension

Item

Trancaction certainty

Certainty that the buyer would pay the selling price Certainty that deadlines are met Certainty that the entire divestment object is sold-off

Item-to-TotalCorrelation

Cronbach Alpha

Item Reliability (confirmatory)

Composite Reliability

Average Variance Extracted

0.874

0.928

0.865

0.929

0.813

0.839 0.847

0.778 0.793

Divestment-Management

14.1 14.2

Selling Price 14.3 14.4 14.1 14.2

0.65***

Speed of negotiations

14.3

Divestment Success

14.4 14.1

Transaction certainty

14.2 14.3 df = 41 χ2= 47.606

χ2/df = 1.161 CFI = 0.996

GFI = 0.968 AGFI= 0.949

TLI = 0.995 RMSEA= 0.025

Significances: * α ≤ 0.10; ** α ≤ 0.05; *** α ≤ 0.01

Figure 3. Second-order confirmatory factor analysis of the three-dimensional model for divestment success

this factor on performance. Figure 4 illustrates the second-order structural equation model for the impact of the success factors on divestment performance as well as the corresponding fit statistics. The values of local and global fit measures suggest an excellent overall fit of the model. The information quality of the due diligence has the highest effect (0.50) on divestment success followed by the credibility of communication activities (0.48). Moreover, divestment-based reputation of the seller (0.35), openness of communication (0.33) and the quality of warranties (0.21) show significant positive effects. Only the reputation of the divestment advisor (0.11) does not prove to be significant. Altogether, 77% of the variance of the divestment performance is explained by six success factors; this result is an excellent value.

Divestment-based reputation of the seller

Selling price

Reputation of the divestment advisor

Information quality of the due diligence Divestment Success

0.60***

Speed of negotiations

Quality of warranties

Openness of communication

Transaction certainty

Credibility of communication activities

df = 731 χ2/df = 1.507 χ2= 1101.356 CFI = 0.934

GFI = 0.818 AGFI= 0.795

TLI = 0.930 RMSEA= 0.045

Significances: * α ≤ 0.10; ** α ≤ 0.05; *** α ≤ 0.01

Figure 4. Second-order structural equation model: influence of the success factors on divestment performance Long Range Planning, vol 45

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Further reading The used items are based on expert interviews in the field of divestment, mergers and acquisition and related areas. The used items are based on expert interviews in the field of divestment, mergers and acquisition and related areas.

Biographies Timo Defren is the head of the department of finance and accounting at the German University of Applied Sciences in Saarbr€ ucken. Before, he was a research assistant for the department of information and communication Long Range Planning, vol 45

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management at the German University of Administrative Sciences Speyer and worked as a consultant with Ernst & Young in the area of transaction advisory services. E-mail: [email protected]. Bernd W. Wirtz is the head of the department for information and communication management at the German University of Administrative Sciences Speyer. Prior to his current position, he was the head of the Research Institute for Strategic Management at the University of Witten/Herdecke and director of the Euro Lab of Electronic Commerce & Internet Economics (ecLab). E-mail: [email protected]. Sebastian Ullrich works as a consultant with The Boston Consulting Group. He was a research assistant at the department of information and communication management at the German University of Administrative Sciences Speyer. E-mail: [email protected].

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