Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide

Chapter 10

Downsizing: Reversing the Error

We have discussed that oftentimes, the market reacts negatively to mergers and acquisitions (M&A). It is the market's way of saying, “Oh no, not another merger or acquisition.” We have also seen the performance of acquirers often leaves a lot to be desired. Many other times, the market and the media will give the acquirer a pass and see how the deal works out. However, in cases where it does not work out and the target is not performing up to expectations, then there may be pressure on management to make some changes. When the target is relatively small compared to the overall business, then there may not be much pressure as the deal is just not that significant. However, the bigger the poorly performing M&A, the more likely management may eventually be forced to make changes. These efforts can either be directed at fixing the acquired entity and making sure it fulfills the pre-deal expectations or getting rid of it. It is the latter option that is the subject of this chapter.

Selloffs and downsizing are sometimes referred to as demergers. They can come in many forms. The most basic, and actually the most common, is a divestiture. This is when the company sells off the one-time target to another buyer who, hopefully, will have better luck with the company. Divestiture deal volume tends to follow M&A deal volume, which makes sense as one company's divestiture is another's acquisition. This is clear in Figure 10.1, which shows the trend ...