class 8 powerpoint

Question 1

Different forms of corporate restructuring

Answer 1

Divestiture

Equity carve-out

Spinoff

Split-up

Exchange offer or split-off

Question 2

Divestiture

Answer 2

sale of part of the firm to an outsider

Question 3

Equity carve-out

Answer 3

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

Question 4

Spinoff

Answer 4

issuance of new shares, but distributed to shareholder on a pro rata basis

ownership pattern does not change

Question 5

Split-up

Answer 5

series of spinoffs and parent firm ends

Question 6

Exchange offer or split-off

Answer 6

issuance of new shares of the subsidiary, but parent firm shareholders are given two alternatives:

1. keeping their shares
2. exchanging them for the newly issued subsidiary shares

Question 7

why was there an acquisition spree in the 1960s?

what ended this trend?

what did this cause?

Answer 7

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

Question 8

what forced firms to engage in divestitures of uncompetitive divisions?

why?

Answer 8

International competition

good market performance is positively related to divestiture activity

Question 9

Reasons for Voluntary Divestiture

Answer 9

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

Question 10

Poor strategic fit of division influencing a voluntary divestiture

Answer 10

the parent firm may intend to move out of a specific line of business that it is no longer appealing

Question 11

Reverse synergy influencing a voluntary divestiture

Answer 11

the constituting firms are worth more separately than within the current group

Question 12

Poor performance influencing a divestiture

Answer 12

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)

Question 13

Capital market forces influencing a voluntary divestiture

Answer 13

multi-segment firms that operate in very distinct businesses (e.g., beverage and mining) may create a strong, unwanted within-firm variance in risk

Question 14

Liquidity of the market for corporate assets influencing a voluntary divestiture

Answer 14

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

Question 15

Cash flow needs influencing a divestiture

Answer 15

a pressing cash flow need may prompt a firm to sell off even a well-performing unit so as to ensure infusion of cash

Question 16

how abandoning the core business could influence a voluntary divestiture

Answer 16

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)

Question 17

spinoff 6 step process

Answer 17

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

Question 18

Step 1. Make a divestiture or spinoff decision

Answer 18

the management of the parent firm must decide whether a divestiture is the suitable course of action (i.e., financial analysis is necessary)

Question 19

Step 2. Formulate a restructuring plan of a spinoff

Answer 19

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)

Question 20

Step 3. Selling the business in a spin off

Answer 20

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

Question 21

Step 4. Get shareholders approval of the plan to do a spin off

Answer 21

The extent to which approval of the plan is necessary depends on deal size and the applicable state laws

Question 22

Step 5. Register the shares of a spinoff

Answer 22

if share issuing exists, then it must be registered with the SEC

a prospectus must be issued

Question 23

Step 6. Completing the spinoff

Answer 23

the deal may be consummated as per a pre-established schedule

Question 24

relevant price effects in voluntary sell offs

Answer 24

Effects of sellers

Effects of buyers

Question 25

Effects of sellers in a voluntary sell off

Answer 25

enables the seller to be more focused in areas a firm tends to be better in

Question 26

Effects of buyers in a voluntary sell off

Answer 26

buyers that operate in the same segment as the one related to the firm being sold tend to enjoy positive spillovers related to complementarity aspects

Question 27

in a spin off, hos is the pro rate distribution to the owners of the parent firm done? what does this mean?

Answer 27

via dividend payments

shareholder approval is not required (except when the bulk of the firm’s assets is involved)

Question 28

sponsored spinoff

Answer 28

an outsider (i.e., sponsor) acquires ownership in the spun-off firm via an incentive (i.e., discount) on share price

Question 29

spinoffs vs equity carve-outs

Answer 29

Spinoffs are normally easier to carry out and less expensive compared to equity carve-outs

Question 30

when do spin offs qualify for tax free treatment?

Answer 30

The parent firm must own at least 80% of the unit being spun off

The parent firm must not have acquired control of the unit less than five years earlier

Fulfillment of the business purpose test (i.e., the parent firm should not be exclusively motivated by avoiding taxes)

Question 31

which generate higher value for shareholders between spin offs and sells offs?

Answer 31

spin offs

Question 32

who experiences a negative abnormal return during spinoff announcements?

why?

Answer 32

Bondholders

loss of collateral value & bankruptcy protection

Question 33

Financial and large firms tend to be widely or family held?

Answer 33

widely held

Question 34

non-financial and small firms tend to be widely or family held?

Answer 34

family held

Question 35

who has the power to fend off unwanted monopolies that arise following acquisitions?

how do shareholders react to the sell off?

Answer 35

regulators

investors price the sell off in ex ante

Question 36

true or false

there exists little evidence indicating that the mergers have had collusive or anticompetitive effects

Answer 36

true

Question 37

Why might a tenant prefer a lease with a higher effective rent than an alternative lease with a lower effective rent?

Answer 37

The tenant may want to keep the space for a prolonged period of time

or

because the tenant believes that the rent rates will go up over the time of the extend lease

Question 38

Describe the most common methods used to specify rent changes over time for a commercial lease

Answer 38

flat rent with an expense provision

graduated rent clauses

indexed leases

percentage rent