Selling to buy: Asset sales and acquisitions

Are firms that sell assets more likely to make subsequent acquisitions? Recent research suggests firms which decide to do this joint selling-to-buy asset restructuring can see a double benefit effect on operating efficiency and improvement in their capital liquidity (i.e., disposing unwanted assets and using liquidity to acquire assets that improve efficiency).

This increase in capital liquidity from asset sale proceeds can also become a significant source of allocable capital for firms, suggesting that selling-to-buy restructuring can be especially vital for financially constrained firms. The liquidity injection provides these firms with the opportunity to undertake positive net present value projects and further improve their operating efficiency.

How and by how much do financially constrained firms benefit from this selling-to-buy activity? Particularly for financially constrained firms, research suggests that selling assets unrelated to their core business and then using the liquidity to buy assets related to their core industry improves three-year operating performance by 5.72 per cent, thus, benefiting from the double benefit effect.

Does the market react to these selling-to-buy decisions, and if so, which decisions does it value the most? At the announcement of the asset sale the market reacts more favourably for financially constrained firms that increase their focus in the core business relative to firms that buy unrelated (to their core business) assets. These firms experience 4.69 per cent higher cumulative abnormal returns at the asset sale relative to their counterparts. In economic terms, the selling-to buy-decision leads to an increase in the value of a mean size acquirer at the asset sale announcement, reaffirming that the market rewards joint asset restructuring activities that offer a double benefit.

Overall, the importance of asset sale proceeds as an additional funding source for corporate investments in undeniable. Managers should consider selling-to-buy activity as a core component in their asset restructuring-investment agenda as it appears that firms that engage in these activities reap substantial rewards.

For a full version of the research paper, ‘Selling to Buy: Asset Sales and Acquisitions’ please contact: sbs@surrey.ac.uk.