A Theory Of Bust-Up Corporate Takeovers

Abstract

Quite often, the market value of a firm in parts exceeds its value as a single entity.  The maximum value can be attained in such instances, by splitting the firm up.  We observe several instances where a firm’s management breaks up the firm to achieve maximum value.  In other cases, firms require a change in management to initiate divestiture. Lastly, takeover by outsiders is sometimes required to split the firm up and sell it in parts to achieve full value.  This study provides an economic analysis of the payoffs to all parties involved in a corporate breakup.  Models of the costs and benefits to shareholders and management teams are developed for each of the three situations listed above to explain why the different circumstances occur in different cases.