Organizations Lost in Limbo?: An Investigation of the Impact of Impending Divestiture on Business Unit Strategy & Performance

Patia McGrath, Kenan-Flagler Business School

Abstract: This research examines the impact of impending divestiture on business unit strategy and performance. Divestiture deals can be multi-year transactions with highly uncertain endings. During the deal period, as the parent-unit tie weakens, business units are placed into an organizationally-orphaned, limbo-like state. The changes in the strategies and performance of these divesting units — as revealed through their actions regarding their innovation approaches, product development, marketing initiatives, and the like — are underexplored. Indeed, despite the ubiquity of divestitures and their powerful role in shaping firm boundaries, major theoretical gaps concerning divestiture remain. This research aims to address two such gaps: first, while divestiture’s “pre-deal” antecedents and “post-deal” consequences are quite well understood, little is known about what occurs in the “during-deal” phase; second, although divestiture’s implications for the selling parent have been thoroughly investigated, only scant attention has been paid to its impact on the unit. By tackling these questions, it is hoped that this research will not only make novel contributions to the strategy, organizational theory and innovation literatures, but also offer pragmatic insights to executives involved in the management and sale of divesting business units. Content analysis of publicly available sources will be used to study divestitures in innovation-oriented industries from 1985 to 2005.