class 8 powerpoint Flashcards
Different forms of corporate restructuring
Divestiture
Equity carve-out
Spinoff
Split-up
Exchange offer or split-off
Divestiture
sale of part of the firm to an outsider
Equity carve-out
variation of divestiture that involves the sale of an equity interest in a subsidiary to outsiders
a new legal entity is created with different ownership pattern
Spinoff
issuance of new shares, but distributed to shareholder on a pro rata basis
ownership pattern does not change
Split-up
series of spinoffs and parent firm ends
Exchange offer or split-off
issuance of new shares of the subsidiary, but parent firm shareholders are given two alternatives:
- keeping their shares
- exchanging them for the newly issued subsidiary shares
why was there an acquisition spree in the 1960s?
what ended this trend?
what did this cause?
firms wanted to increase their share prices
tax and regulatory changes have put that trend to an end
–> As a result, firms were forced in the 1970s to sell off divisions to raise funds and improve cash flow
what forced firms to engage in divestitures of uncompetitive divisions?
why?
International competition
good market performance is positively related to divestiture activity
Reasons for Voluntary Divestiture
Poor strategic fit of division
Reverse synergy
Poor performance
Capital market forces
Liquidity of the market for corporate assets
Cash flow needs
Abandoning the core business
Poor strategic fit of division influencing a voluntary divestiture
the parent firm may intend to move out of a specific line of business that it is no longer appealing
Reverse synergy influencing a voluntary divestiture
the constituting firms are worth more separately than within the current group
Poor performance influencing a divestiture
an underperforming division may undermine the overall firm performance (e.g., it is not able to pay at least the firm’s hurdle rate – i.e., the overall/average cost of capital)
Capital market forces influencing a voluntary divestiture
multi-segment firms that operate in very distinct businesses (e.g., beverage and mining) may create a strong, unwanted within-firm variance in risk
Liquidity of the market for corporate assets influencing a voluntary divestiture
market liquidity tends to shape the segments in which a firm will operate or exit
In particular, firms tend to divest segments from industries with more liquidity for corporate assets, unrelated segments, poorly performing segments, and small segments
Cash flow needs influencing a divestiture
a pressing cash flow need may prompt a firm to sell off even a well-performing unit so as to ensure infusion of cash
how abandoning the core business could influence a voluntary divestiture
it could happen if the owners believe that the core business reached the stage of maturity (i.e., the firm has already migrated to other more profitable segments)
spinoff 6 step process
Step 1. Make a divestiture or spinoff decision
Step 2. Formulate a restructuring plan
Step 3. Sell the business
Step 4. Get shareholders approval of the plan
Step 6. Complete the deal
Step 5. Register the shares
Step 1. Make a divestiture or spinoff decision
the management of the parent firm must decide whether a divestiture is the suitable course of action (i.e., financial analysis is necessary)
Step 2. Formulate a restructuring plan of a spinoff
an agreement between the parent firm and its subsidiaries may be negotiated.
The plan should contemplate aspects such as the disposition of the subsidiary’s assets and liabilities, and a cross-section of corporate resources (e.g., human resources, which deals with employee transfers and contract terminations)
Step 3. Selling the business in a spin off
the seller and the banker will pin down potential buyers and market the firm to them by revealing enough information
investment banker eases the process
Step 4. Get shareholders approval of the plan to do a spin off
The extent to which approval of the plan is necessary depends on deal size and the applicable state laws
Step 5. Register the shares of a spinoff
if share issuing exists, then it must be registered with the SEC
a prospectus must be issued
Step 6. Completing the spinoff
the deal may be consummated as per a pre-established schedule
relevant price effects in voluntary sell offs
Effects of sellers
Effects of buyers
