Asset exchanges as a restructuring strategy: Motives and valuation effects

This study examines restructuring in which, (i) two firms exchange operating units (asset-for-asset exchanges), and (ii) a firm divests assets in exchange for an equity stake in the firm acquiring the assets (asset-for-stock exchanges). These transactions are called asset exchanges, as distinct from divestitures primarily for cash. Since liquidity is not the primary consideration, asset exchanges are more suitable than sales of assets for cash when examining the role of synergy in the divestiture decision. An asset-for-stock exchange is similar to a partial merger and creates an alternative form of cooperative strategy and organization to mergers and joint ventures. We do not find evidence of gains to firms in asset-for-asset exchanges. While portfolios of divestors and acquirers in asset-for-stock exchanges gain, an analysis of matched pairs of firms in each transaction reveals that both firms gain only in a third of all cases. Overall, an asset-for-stock exchange leads to an increase in the combined value of the divestor and the acquirer. The gains in dollar value terms are fairly large relative to the gains in takeovers. The sharing of gains is related to the percentage of stock acquired, appointment by the divestor of directors on the acquirer's board, voting restrictions on stock, the use of cash as a part of the consideration and the financial condition of the divested unit. The results of this study suggest that returns to firms undertaking asset exchanges cannot be explained by synergistic motives alone and indicates a need to examine other possible motives in asset exchanges as well as in other forms of divestitures.