Inherited Fragmentation And Streamlining: How Target Scope Decisions Shape Acquisition Evaluations

Abstract

We examine how a target firm’s recent acquisitions and divestitures shape investor expectations of 
acquisition value creation. Drawing on corporate strategy and organization design research, we develop a 
structural view of investor evaluation, arguing that investors use recent target scope decisions as visible 
cues about the organization the acquirer is likely to inherit. We predict that recent target acquisitions 
indicate inherited structural fragmentation, lowering investor expectations, whereas recent target 
divestitures indicate a more streamlined organization, raising investor expectations. We further predict 
that these effects are stronger when the target’s recent scope changes are unrelated to its core business, 
because unrelated transactions provide more diagnostic cues about fragmentation and streamlining. Using 
data on domestic acquisitions among U.S. public firms announced between 1985 and 2019, we find 
support for our view. We contribute to research on corporate strategy and organization design by showing 
that prior scope decisions have structural consequences that become externally consequential when firms 
later enter the market for corporate control.