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Anna Synøve Haldar Holen, Student no. 102666 Finance and Strategic Management

Maren Sunde Bratholm, Student no. 102547 Applied Economics and Finance



Copenhagen Business School Master Thesis 2020

Cand.merc. Department of Finance Number of pages / characters: 120 / 272 653



Divesting is traditionally seen as a response to a pressing need for additional funds, rather than a strategic option to fund growth. However, this viewpoint has been shifting as companies become more proactive by continually evaluating their business portfolios to respond to the current, disruptive environment. This created the desire to investigate the underlying motives for divesting and test its potential value creation.

Working on this thesis has been time-consuming, yet highly interesting and educational. As the preparation of a master thesis is a relatively open process, not bound by strict guidelines regarding the choice of topic, working together and shaping the thesis has been a rewarding learning

experience. However, it is worth mentioning that the ongoing Covid-19 pandemic has exposed us to more challenges than we initially anticipated. Due to the lockdown, parts of the content have been adjusted and the scope has been reduced.

The inability to use the computers at Copenhagen Business School (CBS) during the lockdown led to some technical challenges, hence some data and analyses in the event study have been

excluded. In addition, a planned interview with a director of Yara was excluded from one of the studies in this thesis. Therefore, only secondary data available has been used, which is however, considered sufficient enough to conduct this study. Furthermore, CBS recommended international students to return to their home countries after the lockdown, which later led to weeks in

quarantine. Since then, the cooperative work between the authors has necessarily been mainly online. However, throughout the entire working process, we have focused on gaining broad and deep knowledge about divestments and are proud of what we have managed to learn about the topic.

We would like to express our gratitude to our supervisor, Poul Kjær, for his support and guidance throughout our extensive work process. Poul motivated us in these challenging and uncertain times, and in turn made this writing experience even more interesting.



Traditionally, M&A has been considered an optimal approach to restructure a company, motivated by the aim to diversify and spread operational risk. Not all firms share the opinion that they might need to shrink their portfolio before creating growth opportunities. However, according to recent research, this trend is changing as divesting more proactively to fund growth has become a more frequently used strategy. Although there is consensus in the existing literature that divestments create shareholder value, limited research on this topic has been done on the Norwegian market.

These arguments lead to the thesis’ central problem statement, posed as the following question:

“What are the motives behind a divestiture, and is there empirical evidence of Norwegian divestments creating shareholder value?” The problem statement can be addressed by first investigating the motives behind the decisions to divest, followed by testing the value effect by the means of two empirical studies.

The first study is an event study, investigating whether the announcement of multiple Norwegian divestments over the past decade created positive average abnormal returns (AAR) for the vendor companies. The result gave a statistically significant AAR of 2,5% on the announcement day, providing empirical evidence of divestitures creating value for Norwegian companies. To provide a deeper understanding of potential value effects, a case study was also conducted of the ongoing carve-out announced last year by the Norwegian fertilizer conglomerate Yara. The applied valuation found that each company generates a higher fair value combined than Yara as a

consolidated company. In fact, the combined value was 8,5% higher than the market value of Yara, which indicates that the company is being traded at a conglomerate discount of 8,5%.

While the case study is based on only one specific company which offers limited basis for scientific generalizations, the event study covers multiple divestments. Combining both studies provides a better basis for addressing the central question posed by this thesis. Based on both studies, one could therefore draw the conclusion that there is empirical evidence of divestments creating shareholder value for Norwegian companies. However, it is important to emphasize that these studies only cover a period of relatively robust market conditions. Therefore, conclusions based on the studies cannot be drawn as to whether divestments could create shareholder value in the Norwegian market during an economic downturn.


Table of content

1.0 Introduction to the thesis ... 5

1.1 Introduction and motivation ... 5

1.2 Problem statement ... 6

1.3 Organizing the thesis ... 7

1.4 Scope and limitations ... 7

1.5 Methodology ... 8

1.6 Sources and validity ... 9

1.7 Literature Review ... 10

2.0 Characteristics and motives behind divestitures ... 10

2.1 Scope, limitations and methodology ... 11

2.2 Different types of divestments ... 11

2.3 Underlying logic for divesting ... 13

2.4 Motives for divestments ... 14

2.4.1 Corporate governance mechanism ... 14

2.4.2 Financial motives ... 15

2.4.3 Strategic motives ... 16

2.5 Sub-conclusion of Section 2 ... 19

3.0 Empirical event study ... 20

3.1 Introduction to the section ... 20

3.1.1 Scope and limitations ... 20

3.1.2 Methodology ... 21

3.1.3 Literature review ... 22

3.2 Hypothesis development ... 23

3.3 Data collection and sample characteristics ... 24

3.3.1 Total sample ... 24

3.3.2 Sub-sample: Major deals ... 26

3.3.3 Sample characteristics ... 27

3.4 Event study methodology ... 28

3.4.1 The event date ... 28

3.4.2 The estimation period and event window ... 28

3.4.3 The Market Model ... 29

3.4.4 Statistical significance ... 31

3.5 Results of the study ... 33

3.5.1 Result and evaluation of Hypothesis 1 ... 33

3.5.2 Result and evaluation on Hypothesis 2 ... 35

3.6 Existing research on divestments ... 37

3.7 Discussion of the results found ... 38

3.8 Sub-conclusion of Section 3 ... 40

4.0 Carve-out ... 41

4.1 Introduction to the section ... 41

4.1.1 Scope and limitations ... 42

4.1.2 Methodology ... 43

4.1.3 Literature review ... 44

4.2 About Yara ... 45


4.3 Production process ... 49

4.3.1 Production Value Chain ... 49

4.3.2 Industry ... 50

4.4 Introduction to the carve out ... 54

4.4.1 RemainCo and NewCo ... 54

4.4.2 Peer Group ... 55

4.5. Reformation ... 57

4.5.1 Accounting quality and principles ... 57

4.5.2 Reformulation of Yara ... 57

4.6 Carve-out financials ... 59

4.6.1 Complete allocation to each segment ... 60

4.6.2 Allocation of shared group-items and elimination of inter-company transactions ... 62

4.7 Profitability- and liquidity analysis ... 65

4.7.1 Dupont analysis ... 65

4.7.2 Liquidity analysis ... 67

4.8 Strategic analysis ... 69

4.8.1 PESTLE ... 70

4.8.2 Porter's 5 Forces ... 74

4.8.3 VRIO (Valuable, Rare, Imitable and Organized) ... 78

4.9 SWOT ... 81

4.10 Motivations behind the carve-out decision ... 83

4.11 Valuation ... 85

4.11.1 Budgeting ... 85 Forecast of revenue...87 Forecast of operating expenses...90 Forecast of other income...93 Forecast of the balance sheet...94

4.11.2 Weighted Average Cost of Capital (WACC) ... 96 Capital structure………...97 Investors required rate of return...98 Cost of debt………...102

4.11.3 Discounted Cash Flow (DCF) model ... 103

4.11.4 Relative valuation - multiple analysis ... 105

4.11.5 Sensitivity analysis ... 106

4.12 Discussion of the results found ... 108

4.13 Scenario analysis ... 110

4.14 Sub-conclusion of Section 4 ... 112

5.0 Discussion, perspective and conclusion of the thesis ... 114

5.1 Discussion in the thesis ... 114

5.2 Perspective ... 117

5.3 Conclusion of the thesis ... 117

Literature list ... 121

Appendix ... 137


1.0 Introduction to the thesis 1.1 Introduction and motivation

The overall research field of this master thesis is divestments as a type of corporate restructuring.

Divestments or divestitures are defined as the disposal of one or several assets, business units or products held by the company to a new owner (Arzac, 2008). Companies have traditionally favored the merger and acquisitions (M&A) approach to restructuring rather than actively engaging in divestitures to create value for their business (Dranikoff et al. 2002; Zuckerman, 2000). This trend has changed, however, as companies that diversify and engage in multiple unrelated business segments are typically traded at a price below the combined value of the separate entities. This is commonly known as a “conglomerate discount,” characterized by inefficient resource allocation and other disadvantages of the conglomerate structure (Kose & Ofek, 1995; Servaes, 1996). The effect is confirmed by various studies in Western countries, which have found evidence of

discounts ranging from 5-15% compared with the sum of a firm’s parts (EY, 2019; Morgan Stanley, 2011). Still, many companies choose the “buy side,” rather than evaluating their current business portfolio for possible non-profitable assets or business units (Whale, 2015). The focus in this thesis will be on the “sell side,” i.e. on the decision to divest.

Divestments may be considered when a business unit is not performing well or is challenging to keep (Cho & Cohen, 1997; Whale, 2015), making the company in total viewed as inefficient.

However, some studies have found that divestments are in fact products of strategic decisions to fund growth (EY, 2019; Weston, et al., 2014). Companies are moving from rigid models of large conglomerates to flexible business models more responsive to the current disruptive environment (Whale, 2015), referred to as the “deconglomeration” trend (EY, 2019). This process has led to a majority of companies becoming more proactive in their divestment strategy. In fact, a corporate divestment report conducted by EY states that 84% of the companies interviewed planned to divest within the next two years (EY, 2019). Based on the findings above, it is pertinent to investigate the motives behind a divestment decision and to explore whether and how this process might create shareholder value.

Although the topic is highly relevant, divestitures are not fully explored by existing research, which has typically regarded them as a side aspect of M&A (Brauer, 2006). The existing literature on the value creation of divestments are mainly on North American and European markets (Erxleben, 2015; Weston et al., 2014), while limited number of studies are found on Norwegian divestments.

While Norway is a small country in population size, it has a stable political and economic system, one of the highest GDP per capita rates in the world (SSB, 2016), rich natural resources and


strong protection of property rights. This makes the Oslo Stock Exchange (OSE) an attractive market for international investors (Medleva, 2019). Therefore, this thesis aims to provide new insights to existing knowledge by exploring the value creation of Norwegian divestments.

Based on the motivation above, this thesis seeks to determine whether divestments create value for shareholders. This value creation is explored by initially investigating the motives behind the decision to divest, followed by testing its value creation, using one event study and one case study, in order to provide both a broad and deep understanding of the topic. Both studies follow the same criteria in terms of the geographical location and time period investigated. They differ in other respects, as the event study evaluates multiple divestments based on a statistical approach, while the case study is a deeper investigation into one specific divestment, incorporating interpretations regarding how and why a divestment creates shareholder value.

The event study will examine whether there is empirical evidence of shareholder value creation from various Norwegian divestments. This will be done through an assessment of abnormal return on the stock prices at the time of the divestment announcement. Subsequently, the case study seeks to explore the value effect of the ongoing divestment, more specifically a carve-out, by the Norwegian fertilizer company Yara. This will be done by testing whether the two separate

companies after the separation yields a higher value combined than Yara as a consolidated entity through a sum-of-its-parts (SOPT)-valuation. This creates a basis for testing the phenomena behind the theory of the conglomerate discount and provides an indication of whether Yara is traded at a discount.

1.2 Problem statement

Previous research supports an overall hypothesis that divestments do create shareholder value.

However, due to limited research on the Norwegian market, the thesis will test if the hypothesis holds true for divestments in this geographical area. This leads to a hypothetical-deductive approach to address the problem statement, with partial exploratory and interpretative features.

Although existing research has found evidence of the value creation of divestment announcements and conglomerate discounts, these theories will be tested in a different context, by studying the Norwegian market in two empirical studies. Combining these studies will provide an analysis of the field from an angle which, as far as known, has not yet been tested. Hence, the motivation and discussion in Section 1.1 create the grounds for the following problem statement, posed as a


“What are the motives behind a divestiture, and is there empirical evidence of Norwegian divestments creating shareholder value?”

In order to answer this thoroughly, the following sub-questions are created and will be discussed throughout the thesis:

What are the key motives behind the decision to divest?

Is there empirical evidence that the announcements of Norwegian divestments create shareholder value?

What are the possible motives behind Yara’s decision for doing an equity carve-out?

What is the fair value of Yara’s equity carve-out and do the two separate companies yield a higher value combined than Yara as a consolidated company?

1.3 Organizing the thesis

The first section of the thesis provides a comprehensive introduction. It presents scope and limitations, methodology, and a literature review. All of these will be discussed further in each respective section. Section 2 presents multiple motives behind divestments, based on the research literature. The event study is set out in Section 3, which investigates the effects of the

announcements of Norwegian divestments. Section 4 will outline the case study discussing the possible motives behind Yara’s ongoing carve-out, as well as examining whether it creates a higher value for the two separate companies combined, compared with Yara as a consolidated company. As a result, the theory of conglomerate discount will be assessed in the same section.

Each section includes a discussion of the results found and a sub-conclusion analyzing the

respective sub-questions. Lastly, Section 5 presents a comprehensive discussion of the thesis and its findings, as well as perspective and a final conclusion that answers the central problem


1.4 Scope and limitations

The overall research field of this thesis is divestments as a form of restructuring a company.

Although there are other forms of restructuring creating value for shareholders, such as M&A, this thesis will focus on divestitures. The objective is therefore to test whether divestments create shareholder value. Each section includes a discussion of its respective scope and limitations.

Unlike Section 2, which covers a broader topic, Sections 3 and 4 only include Norwegian


divestitures. Both studies cover the same time-period of the last decade, representing the same economic situation, which strengthens any inferences from the analyses of value creation in the present market. Furthermore, the event study will investigate the value effect of divestment

announcements in the short term, while the case study attempts to test the creation of value from a longer-term perspective.

The master thesis will mainly focus on divestitures in a general sense, which is why the different types of divestments will be presented in Section 2. The exception is in Section 4, as it is based on only one specific divestment type, i.e. a carve-out. Since Yara’s carve-out is an ongoing process, topical events affecting the transaction should be considered. Currently, the global economy is in the midst of a crisis due to the Covid-19 pandemic, which has significantly impacted the financial situation worldwide. Given the uncertainty and unpredictable prospects, this event is excluded from the calculation, leading to an information stop in mid-February (February 14, 2020). However, the impacts of Covid-19 will be presented in a scenario analysis.

1.5 Methodology

Overall, the problem statement can be approached from multiple perspectives. Although this thesis aims to incorporate different views of the value effects of divestments, the research methodology is mainly descriptive, providing measurable statistical output. In order to avoid drawing causal

inferences, however, the thesis attempts to comprise underlying understandings and interpretation of the topic, leading to the analysis being partly exploratory. Finally, by obtaining a theoretical understanding of the concept of divestment, it is possible to examine its empirical context, especially as to whether the potential value creation evidenced by the studies follows the logic suggested by existing research and theories.

The reasons for engaging in divestments, which will be found in Section 2, are based on the academic literature, business theories and existing research and will be used as a basis for the whole thesis. Furthermore, an event study and a case study will be conducted in order to find empirical evidence, which is data obtained to prove or disprove a hypothesis (CFI, n.d.), of whether Norwegian divestitures create shareholder value. The event study will be conducted using

statistical tools and models, mainly following the theories of Weston et al. (2014), Erxleben (2015), Brown & Warner (1980) and Agresti et al. (2018). On the other hand, the case study primarily applies a DCF-model supported by a multiple analysis, in order to test whether two separate


analyses are based on the theories of Petersen & Plenborg (2012), Petersen et al. (2017),

Sørensen (2012) and Koller et al. (2015). In addition, based on previous research on conglomerate discount, the valuation analyses will provide a further assessment behind this theory. The

methodologies used will be further discussed in detail in their respective sections.

1.6 Sources and validity

The data applied in this thesis is mainly publicly available information, both quantitative and qualitative. The theory and findings in all sections are primarily based on academic journals and books available from CBS library. Moreover, the data selection in Section 3 is based on various criteria from mainly two databases of CBS. Since the investigated object in section 4 is a publicly traded firm, the information is only based on sources available to the public such as websites, financial statements, governmental and non-governmental institutions. In addition, reports from investment banks such as Sparebank 1 and Pareto Securities have been applied where the public information is less sufficient.

Regarding the thesis’ solidity and credibility, the scientific quality is utmost important. To secure this quality, three criteria should be satisfied including validity, reliability and adequacy (Bitsch Olsen & Pedersen, 2005). The results in Section 3 and 4 are analyzed and discussed, as well as compared, throughout the thesis from multiple perspectives and angles. Additionally, the applied assumptions are thoroughly assessed, making the results considered valid. Further, the authors have focused on being critical to the assumptions applied and the results found, especially to biased sources with potentially lower objectivity, such as information published by a company itself.

The sources mentioned above are considered reliable, as the data and information applied are viewed as trustworthy sources, e.g. institutes, newspapers and companies, that are responsible for publishing correct information. The information obtained has, nevertheless, been critically

evaluated and thoroughly overviewed, leading to various non-reliable sources being excluded.

Besides, the authors have put aside all preconceived beliefs when collecting the data, to make sure of a neutral and objective gathering process, for the findings to be a result of science and not subjective beliefs. In addition, the adequacy is considered fulfilled as the sections below answer the problem statement and respective sub-questions. Finally, although the three criteria are considered fulfilled, their quality and possible points of criticism are discussed throughout the thesis.


1.7 Literature Review

A literature review presents and critically analyzes prior research on a given topic or subject area, by identifying gaps in current knowledge. In this regard, the relevance and quality of previous studies are evaluated (Royal Literary Fund, n.d.). Although this thesis builds on a foundation of existing research, it provides a new angle to existing knowledge, as finding evidence on

shareholder value creation of divestments in Norway is argued to be a limited research field. Thus, since there is evidence of value creation in other geographical areas, this thesis aims to test this theory in another economic context.

Not all companies share the understanding that they might need to shrink their business portfolio before creating growth opportunities for core- or profitable business units (Fubini et al., 2013).

However, it seems now to be consensus in existing literature that divestments create shareholder value (Erxleben, 2015; Weston, 2014; Dasilas & Leventis, 2018). In fact, various studies show that companies conducting divestments outperforms companies passively holding their business portfolio or are solely based on a M&A strategy (Brandimarte et al., 2001). However, empirical studies on divestments are still limited compared with M&As (Brauer, 2006; Erxleben, 2015). This thesis aims to provide evidence on shareholder value creation of Norwegian divestiture by means of two empirical studies. Section 2 of this thesis introduces and discusses existing research of motives behind divestitures, and provides a basis for additional literatures for the following sections in order to obtain a deeper understanding by exploring the topic. In Section 3, the literature review presents existing research based on several event studies calculating the abnormal return of divestment announcements. Lastly, the literature review in section 4 includes existing research on the phenomenon of “conglomerate discount” as well as a presentation of successfully completed divestments.

2.0 Characteristics and motives behind divestitures

In the current emerging and tense global economy, companies are forced to pay more attention to their business portfolio in order to manage market uncertainties such as geopolitical concerns and global competition. In fact, 66% of companies in a report conducted by EY, review their portfolio at least every six month and continue to actively dispose of underinvested assets left in the hands of another owner (EY, 2019). To be able to investigate the value creation of divestments, one needs to understand the elementary motives behind the decision to divest. This will be done by


introducing the main types of divestitures, followed by an explanation of their underlying logic, which creates the basis for discussing the key motives for a company to conduct divestments.

2.1 Scope, limitations and methodology

By evaluating the key motives behind a divestment, the thesis is provided with a deeper understanding and interpretation of the topic from a more explorative view. Although there are multiple motives for divesting, this section is limited to only include the ones the authors find relevant. Further, this section is not considered towards one specific divestment type but covers the main types in order to explore a broader understanding of what drives companies to divest. In addition, the motives are neither associated with a particular geographical area but rather on a worldwide basis. The findings are based on a range of academic literature, business theories and existing research. In addition, different reports are applied, such as the divestment studies

conducted by EY and Deloitte.

2.2 Different types of divestments

When evaluating alternative responses to changes in the market, managers have various strategic options when restructuring a company. The three primary methods of divestitures are equity carve- out, asset sale, and spin-off (Weston et al., 2014). These types are in some ways similar but are used in different situations depending on the state of the capital market, the nature of the asset and the purpose of ownership control. Additionally, the company also needs to decide on what to divest. This could be a subsidiary, a specific product or division, a geographical market or a part of a company's value chain, such as marketing & sales or distribution channel (DePamphilis, 2010).

Equity carve outs

Equity carve-out (referred to as carve-out) is defined as “the offering of a full or partial interest in a subsidiary to the investment public” (Weston et al., 2014, p. 289). Hence, this form of restructuring creates a new, publicly traded company with partial or complete autonomy from the vendor

company. Carve-outs are often used in situations where the vendor firm is not willing to give up full control of the business, unable to find a single buyer or the need for cash is presently (Koller et al., 2015; Hayes, 2019). Therefore, this form commonly leaves the vendor company with a majority share of the subsidiary, of which only a minority of the shares are carved-out first. Carve-out is often part of a broader divestiture strategy, subsequently followed by either a spin-off of the remaining shares to shareholders or a sale of shares to another firm (Weston et al., 2014). The


figure below illustrates how the vendor company carves-out a business unit through an IPO by receiving cash in return, prior and post the restructuring.


Spin-offs are similar to carve-outs, except that the vendor company divest all of the shares to the existing shareholders of the vendor company. Spin-off is defined as “a pro rata distribution of shares in a subsidiary to the existing shareholders of the parent” (Weston et al., 2014, p. 290). In this type of divestiture, no cash is generated by the vendor company. (Weston et al., 2014). The figure below illustrates the vendor company prior and post the spin-off of the business unit to the existing shareholders of the company.


Asset sale

Asset sale is defined as “the sale of a division, subsidiary, product line, or other assets, directly to another firm” (Weston et al., 2014, p. 289). However, under asset sale, the transferred asset is absorbed within the structure of the acquiring firm. In this form of divestitures, payment is usually in cash, but can in some cases be in the stock of the buying company (Weston et al., 2014).

Likewise, with the two other divestitures, this form of divestment may be another way of getting rid of “poor fit”. The figure below illustrates how the business unit is absorbed into the buying company by receiving cash.

2.3 Underlying logic for divesting

Traditional theory by Coase (1960) argues that no company creates value by arbitrarily dividing the company into pieces. This is also supported by Modigliani and Miller (1958 and 1961) claiming that without information- and transaction cost, the value of a company is independent of the corporate structure, more specifically the capital structure (Weston et al, 2014). This leads to questions regarding the actual motives behind a divestment. An examination of the underlying logic of why companies restructure will therefore be conducted, in order to understand these motives.

Shareholder versus stakeholder value

The main goal of a firm is presumed to be the preservation of the interest of the owners, i.e. the shareholders (Berk & DeMarzo, 2013). The corporate finance theory explains that the number one objective for a company is to maximize the value of a company’s shares, i.e. shareholder value (Brealey et al., 2008). The value of stakeholders, e.g. employees, shareholders or society, is likewise important, as they greatly influence and affect companies (Freeman et al., 2010). By acting socially and sustainable responsible, a company may receive support from stakeholders which is crucial in order to recruit new employees or gain investor trust. It is therefore fair to assume that shareholders support and embrace the incorporation of stakeholders’ interests into the company’s strategy (Berk and DeMarzo, 2013). In other words, maximizing stakeholders’ value is considered included in the goal of maximizing shareholders’ value.


Positive NPV assumption

Since the objective of a firm is to create shareholder value, it should be included in every decision within a company. A divestment decision can be viewed as an investment project, where the underlying goal is to obtain a positive Net Present Value (NPV) (Brealey et al., 2008). Therefore, the decision to divest an asset should be rationalized by the fact that it will create more value than keeping it in-house, i.e. positive NPV. Hence, if all shareholders support the idea that divestments are based on a positive NPV assumption (DePamphilis, 2010), and the valuation are assumed to be correct, all completed divestments should in theory create shareholder value. This leads to the desire to examine the overall assumed reason to divest, i.e. to create shareholder value.

2.4 Motives for divestments

Prior research has traditionally stated that there are two general motives for corporate divestitures:

to raise additional funds or due to financial challenges (Erxleben, 2015). However, there are found many other factors, both internal and external motives, affecting companies to divest. Haynes et al.

(2002) introduces three overall categories representing all the essential motives behind a

divestment. These include corporate governance mechanisms and financial and strategic motives, which will be applied.

2.4.1 Corporate governance mechanism

Behavioral motives

Reasons to divest may be viewed as a mix of change in corporate strategy, reversing mistakes and learning, and could be explained as a “healthy and dynamic interplay” between the shifting market forces and strategic planning of companies (Weston et al., 2014). Due to market changes,

companies should proactively incorporate divestment strategy to avoid being forced to sell and not be able to obtain a desired price, which is shown to be an important reason behind 67% of the respondents' unsuccessful divestments (Deloitte, 2009). Managements tend to be reluctant to divest, as it may be associated with the divested unit being “poor” managed or that an

inappropriate project choice was initially made (Boot, 1992). Hence, managements tend to hold on to poorly performing units for too long until the whole firm is experiencing decreased performance (Cho & Cohen, 1997). In fact, 63% of the executives in the research by EY claim they held onto assets too long when they should have divested them (EY, 2019). Thus, due to management's own incentives and reputation protection, the ability to exploit a divestment opportunity to a desired


problems (Berk and DeMarzo, 2013). Jensen and Meckling (1976) offer a model to solve this problem through incentive contracts. These management contracts have significantly increased in the past decades, motivating management to act in the company's best interest (Frydman &

Jenter, 2010), e.g. to exploit divestment opportunities.

Market for corporate control

Growth could be obtained organically or by moving into the capital market through M&A and

divestments. Although this might be costly, it is generally acknowledged that the sale and purchase of assets or business units can create positive net value through increased market power and/or synergies (Walsh & Kosnik, 1993). The decision to hold on to assets too long may be costly for the management. Inefficient management can be a subject of hostile takeover, which is when a

corporate raider purchases a large fraction of stocks to get enough votes to replace the existing management (Berk & DeMarzo, 2013). A new optimal owner and management might in turn drive the company to become a more attractive investment and enhance shareholder wealth (Boot, 1992). In fact, there has been increasing evidence that hostile takeovers have yielded abnormal turnover of the executives in the target firm (Walsh and Kosnik, 1993), putting pressure on

management to efficiently and actively manage their portfolio (Stanford Business, n.d.). Therefore, the concern of being replaced can be a strong motive for exploiting divestment opportunities.

2.4.2 Financial motives

Generate additional capital and strengthen balance sheet

Creating additional capital is considered the second main reason to divest (Deloitte, 2009), which helps strengthen the balance sheet. Lang et al. (1995) suggested that asset sale serves as a source of liquidity, especially when there are difficulties to obtain other sources of finance. In addition, Lee and Lin (2008), proposed that managers are generally not in favor of divest unless there is a pressing need for additional funds (Erxleben, 2015). For credit-heavy companies, the decision to transform existing non-fitted assets into capital rather than leveraging up, is assumed to create positive reactions from shareholders. Although creating additional capital is still an important reason to divest, this is shifting, as companies now tend to use divestments more actively as part of their core strategy to create growth (Baird et. al., 2020).

Poor performing business unit

Traditionally, a primary financial motivating factor for divesting an operating business relates to its poor performance. This could be due to various reasons, including removing negative synergies or


increasing efficiency by improved allocation of resources. Ravenscraft and Scherer (1987) finds that underperforming units are the most significant contributor to a divestment. As mentioned, there is additionally empirical evidence that firms hold on to “losers” too long, affecting the whole firm’s performance (Cho & Cohen, 1997). Therefore, Jain (1985) claims that companies experience negative abnormal returns in the years prior to their divestment, motivating them to sell poor performing business units.

Financial distress and bankruptcy threat

As previously discussed, management tends to be reluctant to divest as divestments traditionally have been viewed as companies experiencing “failure” or the divested unit has been “poor”

managed (EY, 2019; Boot, 1992). Lovejoy (1971) supports this view by suggesting that divestment decisions are largely an attempt to avoid bankruptcy or due to other financial constraints. Although current divestiture decisions seem to be more strategic and proactive, avoiding financial distress and bankruptcy are still a driving factor for financial restructuring (Weston et al., 2014). This

financial situation often leads to involuntary divestments, where companies are being forced to sell, often due to external factors such as governmental regulations or increased competition (Cho &

Cohen, 1997). In such cases, companies are dependent on surviving, which in some extreme cases leads to divesting their most profitable assets or core business to achieve a desired price. A fire sale may therefore be the final option, which is characterized as a divestment being heavily discounted (Kenton, 2020). An example of a such divestment due to financial constraints was the recent fire sale of Hong Kong Airlines’ assets (Hong and Ha, 2019).

2.4.3 Strategic motives

Core versus non-core business unit

Kaplan & Weisbach (1992) argues that the most cited motive behind divestitures is corporate refocusing, which Zhou, Li & Svejnar (2011) describe as the firm divesting a peripheral business unit outside the firm's core business line. Newer research by EY shows that 60% of the capital raised in divestitures, was spent on investing in core business (EY, 2019). This indicates that divestments could be motivated by the desire to refocus the company's strategy by concentrating more on its core business and leaving the non-core or non-fitted business unit to another party.

Hite et al. (1987) argues that allocating the business to the most productive managers leads to efficiency gain. In support of this, John and Ofek (1995) claim that asset sales are motivated by the aim to remove operations with negative synergies, and thus increase firm efficiency (Erxleben,


the effort tied up in a non-strategic business, making divestments a source of capital to fuel growth and create value for shareholders (Baird et al., 2020).

This focused strategy on selling non-core assets differs from the more traditional strategy of large conglomerates diversifying the company's business portfolio. Many acquisitions have been motivated by the aim of diversifying, where companies wish to spread the operational risk and create economies of scale by exploring synergies between business units (Zuckerman, 2000).

However, the market has proved to find the conglomerate structure unfavorable, leading to the concept of conglomerate discount (Kose & Ofek, 1995, Morgan Stanley, 2011). Since investors often have trouble valuing companies operating in many different industries or sectors, focused strategy is considered favorable as shareholders easily can diversify their portfolio themselves (Gaughan, 2002; Kose & Ofek, 1995). Zuckerman (2000) points out the difficulties to achieve synergies, as the different units might become challenging to manage beyond a certain level of diversification (Zuckerman, 2000), i.e. the complexity costs of diversification exceeds the economic benefits.

Information asymmetries and Transparency

Focusing on the core business and minimizing the diversification by selling assets and unrelated businesses, increases transparency and makes it easier for investors to understand and recognize the performance and value drivers of the company (Zuckerman, 2000). Reducing information asymmetries is another motive for divesting, as information regarding the company’s actions and the divested unit increases when a divestment is announced (Weston et al., 2014). Therefore, selling assets to increase the transparency of the firm, reduces information problems, making it easier to price fair and correctly (Zuckerman, 2000).

External changes

Porter’s Five Forces (1980) explains how external factors should be continuously evaluated, as it can identify potential problems and threats for a company’s business but also create opportunities (Kotler et al., 2016). Unlike internal factors, external factors are outside a firm’s control and may challenge the profitability of a firm’s business units. Nowadays, there is an increasing pressure by shareholders for companies to be, among other things, corporate- and socially responsible, take advantage of technological innovations and incorporate global political changes in the economy (EY, 2019). These contemporary external factors are important factors affecting a divestment decision and will be discussed below.


Competition in the industry

Porter (1985) states that the intensity of competition within an industry affects the success of the competing companies, indicating that companies should get rid of parts of the value chain considered as non-competitive (Kotler et al., 2016). In fact, 85% of companies stated that the trigger point for their recent major divestment was the weak competitive position of the divested unit (EY, 2018). Further, the attractiveness of entering industries increases when there exist growth opportunities in the market (Kotler et al., 2016). A study of entry and exit strategies among various industries, showed that companies tend to exit their non-core operations in times of growth

opportunities in their core market, i.e. high threats of entrants (Sembenelli & Vannoni, 2003).

Based on the above, it can be implied that the divestment rate increases when companies face competition.

Technology and sector convergence

Firms tend to divest to strategically reconfigure their portfolio as a reaction of rivals’ technological innovation and technology-driven changes in consumer habits and supply chain (Kaul, 2012; EY, 2019). Competition within the industry is not the only threat, as companies of other sectors might enter the competing market. In fact, sudden changes in the industry, i.e. new technologies, lead to management reallocating assets to refocus on, or diversify away from their core industries

(Erxleben, 2015). A study conducted by EY (2019) finds that 70% claim that sector convergence drives their divestment decisions, as they focus on innovation in the face of new competition from companies outside their traditional sectors. An example of technology and cross-sector

transformations are the reposition of Philips’ lighting business for new technological growth in healthcare (Pooler, 2019).

Geopolitical shift

Geopolitical shifts, such as global trade wars, pressure the daily business of international

companies. In the report by EY, 74% of the interviewed companies expect that geopolitical shifts will push the operation costs higher, which will affect future divestment plans (EY, 2019).

Furthermore, 69% of these companies stated that cross-border agreements will affect their plans to divest (EY, 2019). Although diversification might lower the risk associated with geopolitical shifts, diverse companies are more exposed, and the cost of managing a diverse portfolio increases with the level of uncertainty and turbulence in the market (Chatterjee et al., 2003). If this leads to an economic downturn in the core market rather than non-core, the sale of non-core assets might be more frequent and profitable (Erxleben, 2015). Therefore, it can be assumed that geopolitical shifts


Sustainability and social responsibility

A number of investors have embraced the concept of socially responsible investing (SRI), which attempts to create financial returns by combining social and environmental benefits (McIntosh &

Brzeszczynski, 2014). However, the relationship between SRI and corporate financial performance (CFP) has not always been viewed as positive. Theorists such as Aupperle et al. (1985) and Friedman (1970) claimed that the cost of being socially responsible outweighs the benefits, hence reducing profit and shareholder wealth. On the other hand, more recent theorists argue for a positive relationship between SRI and CFP, as great social and environmental performance can improve the relationship with key stakeholders (Miles & Covin, 2000; Cheng et al., 2014). In fact, to integrate SRI, investment- and pension funds have been forced to divest in several industries such as in private prisons, tobacco and fossil fuels (Cometto, 2018). The latter is one of the largest reasons for sustainable divestments, as divestments of fossil fuels stocks have reached one of the fastest growing movements in history (Mazengarb, 2019). Further, recent data from BCG/MIT shows that 44% of investors claim that they divest companies with poor sustainability performance (Haanaes, 2016). An example of a company divesting for sustainability reasons is Orsted, a Danish renewable energy company, that divested its upstream oil and gas business to transform the company from fossil fuel to renewables (Orsted, 2017).

2.5 Sub-conclusion of Section 2

This section has discussed the first sub-question by exploring how and why companies in general are motivated to divest. Previous research mainly discussed the motives to create additional capital or respond to financial challenges. This section, however, have discussed multiple motives behind divestments, which is found to be mainly proactive strategic decisions. These motives have been presented, and categorized into financial, strategic and corporate governance mechanisms.

Since the underlying objective for a company is presumed to maximize shareholder interests, a divestment may be seen as a potentially positive NPV decision in order to create shareholder value. However, this creation of value might not always be obtained entirely due to reactive

divestment decisions. One explanation can be that management tends to be reluctant to divest, as it may be associated with the divested unit is being poor managed, leading to agency problems. As a result, hostile takeovers might arise, ensuring that companies are controlled by the most optimal owners and efficient management teams. Thus, the fear of being replaced should encourage action in the shareholder’s best interests by exploiting divestment opportunities.


As mentioned, the creation of additional capital is considered the main financial motive to divest.

Furthermore, companies can also be pressured to restructure due to poor performing business units or, in some cases, forced to divest when companies are under financial distress. This

pressure could be affected by an inefficient operation or by external changes, such as geopolitical instabilities, which in turn affects the financial position. On the other hand, based on a strategic view, firms may be motivated to divest to achieve or maintain a sustainable competitive advantage.

Hence, companies tend to get rid of parts of the value chain considered non-competitive. Internal strategic motives include primarily higher transparency and a more focused strategy concentrating on the core business while leaving non-core activities to a more fitting owner, i.e. creating

efficiency gain. However, strategic motives can also be affected by external factors such as technological innovations, where changes in the market create a need to restructure. Finally, due to an ever-changing environment new trends, such as the focus on sustainability, emerge leading to potential divestments.

3.0 Empirical event study 3.1 Introduction to the section

Based on the motives behind divestments examined in the previous section, questions regarding the actual benefits for the vendor company and its shareholders arise. Hence, this section aims to answer the sub-question of whether there is empirical evidence of shareholder value creation form the announcement of Norwegian divestments. This will be examined through an event study, by calculating the abnormal return on the stock prices of multiple Norwegian vendor companies, at the time of the announcements. Previous literature discussed in this thesis will form the basis for creating two hypotheses. The applied methodology creates directions for calculating the final results, providing grounds for accepting or not accepting the hypotheses. Finally, the validity and reliability of the results found will be carefully discussed and compared with existing research on the field.

3.1.1 Scope and limitations

Finding evidence on value creation from announcement effects will be done through an event study, using the information, literature, and methods considered relevant. Although there are different methods to measure the value effect of divestments, this thesis has chosen to calculate abnormal return from the use of the Market Model, which will be discussed further below. This


Further, the event date will be the public announcement of the transaction, leading to a relatively narrow event window for testing the value creation effect in a short-term perspective. Moreover, as initially mentioned, a substantial part of the motivation for this master thesis is the limited research existing on Norwegian divestments. Thus, the sample in the event study will only include

Norwegian divestitures by looking into the stock reaction of the vendor companies on Oslo Stock Exchange (OSE). This implies that the event study only covers a vendor company perspective, and the value creation is not evaluated for neither the divested company nor the buying company.

However, Section 4 will cover the investigation of a value effect from a divestment for both the vendor- and divested firm.

In order to ensure reliability and validity, the sample in this section is carefully selected based on different criteria. These criteria include specific types of deals and companies, change of control and a chosen time period, which will be further discussed in Section 3.3. Deals announced the last decade between 01/01/2010 and 01/01/2020, will be applied in this analysis, as it represents the current economic market situation reflecting the same market conditions covered in Section 4.

Further, similar to Section 2, the study will include all types of divestments to open for a broad investigation. Therefore, a further breakdown and discussion of the different types of divestiture is not conducted.

3.1.2 Methodology

This section investigates the possible value effects from Norwegian divestments. Although the findings will be compared with previous findings from other geographical markets, this study will not focus on understanding the differences from an explorative view, e.g. examining cultural differences, or different political- or economical systems. However, this study is based on a theory in which the authors want to test the durability and recalls a deductive approach.

Event studies are the most frequently used method to analyze potential success of M&A and corporate divestiture (Erxleben, 2015). Brown & Warner (1980) explains an event study as the

“focus on the impact of particular types of firm-specific events on the price of the affected firms’

securities”, and claims it provides a direct test of market efficiency (Brown & Warner, 1908 p. 205).

Strong (1992) defines it as “... an empirical investigation of the relationship between security prices and economic events” (Strong, 1992 p. 533). Therefore, an event study is ideal to answer part of the problem statement of this thesis.

To measure the stock price effects of divestment announcements, one needs to first calculate the expected return as if the event did not take place, i.e. the market return. There are in general three


main theoretical methods to calculate this expected return, the Mean Adjusted Return, the Market Model and the Market Adjusted Return (Weston et al., 2014). Different from the Mean Adjusted method, both Market methods take into account the market price movement, which occurs at the exact same time as the divestment (Brown & Warner, 1985). The Market methods measures the residual return (from now on called abnormal return), which is the difference between the stock return and the market return (Weston et al., 2014; Brown & Warner, 1980). Unlike the Market Adjusted Model, the Market Model takes into account the systematic and nonsystematic risk of each company and regresses the return against the return on the market index (Brown & Warner, 1985; Weston et al., 2014). The Market Adjusted Model is the simplest model and assumes that the expected return is equal across all securities, i.e. assumes a=0 and B=1. Since this study aims to find the expected return considering the riskiness of each firm's respect to the market, the Market Model is chosen to estimate the abnormal return in this event study.

As mentioned above, the Market Model tests if the divestment announcements have created abnormal returns, i.e. whether stock returns exceed market returns. In general, an increase in stock prices creates shareholder value, arguing for only looking at the stock return of the vendor companies and not including the market return. However, since the aim here is to investigate value creation of divestment announcements, one needs to make sure the reason for any stock price increase during the announcements is not affected by any external market conditions, but by the divestment announcement alone. Hence, the stock return needs to be compared with the market return to test if the divestiture creates a positive abnormal return, i.e. if the vendor companies outperform the market due to the announcements.

The event study and the assumptions behind the selection of samples, time period, event window, as well as the applied models and tests for answering the problem statement, will mainly be based on the theories of Weston et al. (2014), Erxleben (2015), Brown & Warner (1980) and Agresti et al.


3.1.3 Literature review

Although divestments have attracted academic interest since the 1980s (Dasilas & Leventis, 2018), empirical studies on the field are still considered limited relative to M&As (Brauer, 2006). Existing studies are mainly analyzing North American and to some extent European markets, while there seems to be limited research on the Scandinavian and specifically the Norwegian market. The research conducted focuses typically on the reaction on the vendor firm’s stock prices on the announcement date of divestitures, which is mainly showing a positive abnormal return (Weston et


Model to determine the short-term abnormal return in empirical studies (Erxleben, 2015).

Researchers, such as Mulherin and Boone (2000) have used this model in their study and found a positive combined return on assets sales (Weston et al., 2014). Likewise, Lang et al (1995)

conducted an empirical test on divestments in 1995 showing positive abnormal returns and described the need to generate liquidity from asset sale, as the main motivation behind a divestment (Erxleben, 2015). This is in line with the findings by Kose and Ofek (1995), who in another study tested 258 asset sales and estimated that the divesting firms experienced an average of 1,5% wealth increase (Weston et al., 2014). A more recent empirical test by Prezas &

Simonyan (2015) examined the announcement effect of 4192 sell-offs and 378 spin-offs, and found that both categories received significant positive effects. Moreover, the two authors claim that spin- offs have larger announcement effects than sell-off. However, a study by Michaely & Shaw (1995) focusing on long-term performance, showed that future stock price and operating performance of carve-outs were substantially better than the spin-offs vendor.

The above-mentioned research studies have all been on the American market. Elsas & Löffler (2001) seems to be one of the first researchers to explore the announcement effect of carve-outs in Europe. In more recent times, authors such as Wagner (2004) and Pojezny (2006) have studied carve-out announcements in Europe, where the latter was conducted on the German market (Dasilas & Leventis, 2018). Overall, the majority of previous research on divestments are showing positive announcement returns (Erxleben, 2015). There are, however, exceptions to this claim, such as in the study by Gleason et al. (2006), which finds the two-day CAAR to be negative and insignificant (Dasilas & Leventis, 2018). However, this section will test the announcement effect of Norwegian divestments by introducing an angle different from the once presented in the existing literature. Subsequently, the findings in this section will be compared with the existing literature, discussed above.

3.2 Hypothesis development

As previously stated, it is argued that the overall objective for a company is to maximize

shareholder value. Hence, it is fair to assume that the management would never voluntarily agree to a corporate restructure with a negative NPV, i.e. negatively affect shareholder value. According to Section 2, allocation of assets to the most efficient owner, less complexity, raise of capital and refocus on core operation are motives leading to expectations of value creation (Erxleben, 2015).

Part of this value creation is considered captured by the shareholders of the vendor company (Hite et al., 1987). Although the previous research mentioned above have shown positive announcement


effects for foreign vendors, conducting a divestment will clearly contain several risk elements. This event study will test the overall assumed reason to divest, i.e. to create shareholder value, by evaluating if the announcement of Norwegian divestments creates positive stock effects. Based on the above, the first hypothesis is:

Hypothesis 1: The stock price of Norwegian vendor companies will yield a positive abnormal return on the announcement day of the divestitures

Another relevant angle is whether a greater size of the divestment yields a higher stock effect.

Miles and Rosenfeld (1983) and Boone and Mulherin (2000) have found that the greater the relative size of the divestiture, the greater was the announcement return of the vendor company (Weston et al., 2014). Additionally, recent studies of 788 global companies conducted by EY found that the larger the divestments, the greater was the positive impact of the company post sale (EY, 2016). Based on the above studies, investors seem to reward larger divestments leading to a more transformational corporate restructure.

Therefore, this event study will test a sub-sample regarding whether “major” Norwegian divestment deals have greater impact compared with the total sample from Hypothesis 1. The criterion by the above mentioned EY study was categorized as vendor companies with revenue greater than USD 250 million. However, it is arguable that the deal value, i.e. the value of the sold asset, is the most relevant variable determining the stock price effect. Boone and Mulherin (2000) defined “major”

divestments with deal value of at least USD 100 million, leading to a criterion in this sub-sample to only contain divestments with deal value of at least EUR 100 million. Hence, a smaller sample size with “major” divestments is collected, resulting in Hypothesis 2:

Hypothesis 2: The larger the deal value, the higher is the abnormal return of the divestitures on the announcement day

3.3 Data collection and sample characteristics 3.3.1 Total sample

To obtain an overview of Norwegian divestitures, the sample of events are carefully selected from reliable sources. The database Zephyr, which is accessible through Copenhagen Business School’s database, is used to collect the divestiture portfolio. Zephyr includes the possibility to draw several criteria and add information columns relevant for this event study, which is presented


The criteria discussed above comply with those used by Erxleben (2015), which is the one of the main theorists this event study is based on. Based on these criteria, the Zephyr database returns a number of 232 deals.

Sample Criterion Reason

Vendor company

• Norwegian

• Listed on Oslo Stock Exchange (OSE)

Although the acquirers may be foreign, one of the criteria involved the vendor company being Norwegian and listed on Oslo Stock Exchange (OSE). This is also to ensure comparability across the sample, in addition to eliminating various requirements from different exchanges Deal

type • Acquisition

• Institutional buy-outs

• Management buy-outs

• IPO (equity carve-out)

Some deal types, such as venture capital sales, were excluded. This was justified as their characteristics varies from buy-outs and acquisitions when comparing risk level and ownership structure.


of control • Minimum of 30% Another criterion is that the vendor company(ies) sell a minimum of 30% stake. This represents a considerable change of control of the target company, ensuring that the sample represents substantial corporate restructuring for the vendor company.


period • 10 years (01/01/2010

to 01/01/2020) The time period is chosen to reflect the same market circumstances as in the case study. The period excludes the previous financial crisis, and covers therefore a period of “normality”. However, recessions are historically proven to happen occasionally, and need to be taken into account when considering a possibly higher result compared to periods of decline. This will, however, be discussed later in this section.

Number of transactions 232 transactions


However, to ensure reliability and validity, each transaction has been carefully examined. When reviewing the portfolio, transactions not relevant for this event study were removed and is presented in table below.

After the refinement, the final sample portfolio consisted of 74 deals. The complete list of the divestitures can be seen in Appendix 1. Lastly, Thomson Datastream was used to retrieve stock prices from 150 days before and after the announcement date, which led to a bit over 100 trading days prior and post date. The stock prices are common stocks, based on the last price. OSEBX prices were retrieved from OSE in the same time interval to calculate the expected return, which will be discussed in Section 3.4.3.

3.3.2 Sub-sample: Major deals

Hypothesis 2 analyzing whether a larger size of the divestment has a higher stock effect. This sub- sample is a selection of divestments from the total sample based on the same criteria as above, except for an additional criterion only including divestments with a deal value of minimum EUR 100 million. Similarly, to ensure reliability and validity, each transaction was manually examined to verify that the deal value was correct. This resulted in a final sub-sample of 21 deals, shown in

Correction Reason Transactions


Original dataset 232 transactions

Industry Deals within the industries of real estate or financial institutions, e.g. private equity, were excluded since these transactions are not considered actual corporate

restructures. This is justified as the differentiation between strategic divestments and trade sales are unclear and their financial statements differ from other industries (Erxleben, 2015). However, some of these types of deals sold by financial institutions are considered corporate restructuring, as it involved the sale of a department, such as when the bank DnB sold its insurance division, DnB Forsikring AS. Therefore, these kinds of deals were retained

16 transactions removed

Vendor company

The sample consisted of many transactions with multiple vendors, each selling only a small percentage stake.

These deals were excluded, as no main Norwegian vendor company could be linked to the transaction.

35 transactions removed

Listed on

OSE Vendor companies listed on N-OTC and not OSE, were also removed due to low liquidity of the stocks in N-OTC.

Additionally, several deals including multiple vendors that appeared not to be listed on the announcement date were excluded.

23 transactions removed

Deal value Transactions without a deal value were deleted, to ensure comparability between the two samples and in order to test Hypothesis 2.

84 transactions removed

Final number of transactions 74 transactions


3.3.3 Sample characteristics

This event study contains all types of divestments to capture the value creation of divesting in general terms. Based on the various types of divestitures presented in Appendix 1, the total sample is showing variations in the divested part of the company. The majority of the sample is divestments of a business unit or division, such as TTS Group selling its drilling equipment division.

There are also divestments of subsidiaries such as PSI Group’s sale of its wholly owned subsidiary SQS Security Qube System. As mentioned earlier, companies can also divest a geographical market, such as Storebrand selling its stake in Storebrand Baltic in Lithuania. Finally, divesting a specific brand or product is also represented in this total sample exemplified by Aker Solution’s sale of its brand named Pusnes. Further, Appendix 3 illustrates that the majority of the sample represent asset sale and spin-offs, categorized as acquisitions where vendors sell a stake of minimum 30%. On the other hand, there are only six carve-outs categorized as initial public offering, including Yara’s divestment process.

As shown in Appendix 4, the total sample consists of 20 local transactions, meaning that the divested target is both acquired and sold by a Norwegian company. Further, cross-border transactions, i.e. Norwegian vendor and international buyer(s), contain 48 deals, mostly within Europe. Finally, six deals are carve-outs at Oslo Stock Exchange. As previously mentioned, real estate and PE companies are removed from the sample, making the remaining vendors mostly industrial. Figure 4 below illustrates that the number of deals each year are not entirely evenly distributed over time. Most of the transactions were announced in 2011 and 2013, while

subsequently decreased year by year from 2014. The low number of transactions in 2019, might be due to the transactions with no deal value being removed, leading to the exclusion of recent deals, where the values are not yet available.

0 2 4 6 8 10 12 14

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Number of deals each year


3.4 Event study methodology

As mentioned in Section 3.1.2, the methodology in this event study is based on four particular theorists. This section will briefly explain and introduce the steps involved when applying the event study methodology. An explanation of the terms event date, estimation period and event windows will be discussed below. In addition, the model applied will be presented, followed by an

introduction of a statistical significance test and a discussion of the applied confidence levels.

3.4.1 The event date

The Zephyr database categorizes at which time the divestment occurred, into the announcement date, rumor date and the completion date. The date of completion will not be applied as this date may be a long time after the announcement, leading to the reaction of the announcement already being incorporated into the stock price. Likewise, the rumor date is considered less relevant, as this event study are focusing on the reaction effect on the actual announcement date. However, rumors on transactions might affect the market and the stock price development prior to the announcement, which will be further discussed in Section 3.5. In this study, the event date is defined as the day the divestitures officially were announced on the stock exchange, referred to as day 0.

3.4.2 The estimation period and event window

The estimation period is considered the period of days examined in the event study and is used as a benchmark for a “normal” period. As mentioned, the data is based on 100 trading days prior and post the announcement day for each divestment. A study conducted by Strong (1992) finds that the estimation period varies from 60 to 600 days. When calculating standard deviation and running a regression, an estimation length of 90 days (-100 to -11 days) is chosen to capture a broad interval affected by less outliers. This interval ends before the event date to ensure that the announcement is not affecting the calculation. This complies with the one used by Michaely and Shaw (1995) who applied -109 to -10 days.

In addition, event windows need to be determined when calculating abnormal- and cumulative abnormal return as well as t-tests, which will be discussed in the section below. The purpose is to capture all the effects on stock prices of the event, which is usually centered on the announcement day (Weston et al., 2014). Bates (2005) argues for using a long event window, as it is unlikely for investors to fully incorporate all relevant information on the announcement day. On the other hand,



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