Corporate Value Creation from Restructuring Through Divestitures

Corporate divestitures have increasingly gained legitimacy as a strategic option that can also maximize a firm’s equity value. However, their sources of value creation are still not clear to academics and practitioners. This study is based on a comprehensive review of recent conceptual and empirical journal articles widely recognized in the field; it presents the drivers, paths, and performance consequences of corporate divestitures. Corporate divestitures are not always an indicator of past managerial mistakes to deal with poorly performing operations. Divestitures are also a means of strategic reorientation and resource reallocation for value creation when a particular subsidiary operation is no longer fit with the company. This value creation is largely derived from increased corporate focus and more efficient internal governance. Firms may divest operations in one location in response to better investment opportunities in terms of lower production costs and new market in other locations. Asset relatedness and strategic choices at the time of entry influence subsequent exit options in terms of closure, spin-offs, and sell-offs. Performance of divestitures depends not only on these exit modes but also on interdependencies between divested and remaining operations, bargaining advantages, and divestiture implementation and structuring during and after the due diligence. This study demonstrates that the drivers, paths, and performance of corporate divestitures are interdependent. Managers have to consider firm- and industry-level factors across geographic markets and timing of implementation to maximize value creation from divestitures.