Canadian Acquisitions of U.S. Divested Assets

ABSTRACT This paper investigates the impacts on both the selling and acquiring firms in cross-border divestiture transactions between U.S. and Canadian firms. This research addresses questions regarding the degree of synergy resulting from these transactions and the extent to which Canadian and U.S. firms benefit from these sales. The empirical analysis in the paper examines 62 U.S. firms, which sold units to Canadian firms over the 1980-1995 interval, 32 Canadian firms that were acquirers in those transactions, and a subsample of 23 matched-pairs transactions. The methodology employed includes both percentage and dollar abnormal returns. We find gains to U.S. divestor/selling firms of similar magnitudes to those in prior studies of sell-offs by U.S. firms. The gains to Canadian acquirers are larger than those previously identified for buyers in domestic sell-offs. These gains are both economically material and statistically significant. However a wide range of outcomes is observed, particularly for sellers. JEL: F3 Keywords: Corporate restructuring; Cross-border divestitures; Abnormal returns I. INTRODUCTION During the past decade, numerous studies have examined the motives underlying corporate restructuring and its consequences. This literature reflects the increasing use of restructuring strategies internationally and a desire by both researchers and practitioners to better understand the causes and implications of this activity. We extend earlier research into the motivations for, and consequences of, various restructuring strategies and the involvement of firms in sell-offs. While sell-offs are conceptually the simplest form of restructuring, existing research has not yet provided a complete analysis of this activity in the international and cross-border arena. The purpose of this study is to examine the valuation consequences for U.S. divesting firms and Canadian acquiring firms of engaging in cross-border divestitures, and to consider policy and strategic issues associated with these transactions. These two neighboring economies are clearly prominent in matters associated with international economics and finance. There is a greater volume of international trade between the U.S. and Canada than between any two other countries. Along with this flow of commerce comes a high level of Foreign Direct Investment (FDI). Corporate acquisitions (including the purchase of units divested by foreign firms) comprise one of the major channels for FDI. Given the extent of both Canadian/U.S. commerce in general and FDI in particular, it is not surprising that sell-offs frequently involve one firm in Canada, and another in the U.S. Only recently has this link between FDI, restructuring, and corporate acquisitions been formally recognized in the research literature. (1) This paper contributes to the nascent literature on international restructuring by conducting a systematic investigation using cross-border Canadian/U.S. divestitures. We first examine the question; "Do Canadian purchases of U.S. divested assets create shareholder wealth? " Once we get an answer to this question, we then explore the following questions: 'Are Canada/U.S. cross-border asset sales different from purely domestic ones? and "How are the gains from divestitures shared between U.S. sellers and Canadian buyers? " The remainder of the paper is organized as follows. Section II reviews the relevant literature. Testable hypotheses are developed in Section III. Section IV addresses empirical dimensions of the paper, including the sample examined, data employed, and methodology used. Section V reports and interprets the empirical results, with a summary and conclusion in Section VI. II. BACKGROUND AND LITERATURE REVIEW Numerous studies have focused on the motives and valuation effects of primarily domestic sell-offs as a vehicle for corporate restructuring. Examples include Datta and Datta (1996, 1995), Lang, Poulsen, and Stultz (1995), Kaplan and Weisbach (1992), Kaplan (1989), Hite, Owers and Rogers (1987), Klein (1986), Jain (1985), Alexander, Benson and Kampmeyer (1984), and Rosenfeld (1984). …