7/23/2019 Divest 2001

1/48

7/23/2019 Divest 2001

2/48

Dening divestitures

Selling assets, divisions,subsidiaries to another corporation

or combination o corporations orindividuals

7/23/2019 Divest 2001

3/48

Divestitures

Subsidiary B

Company !ithout Subsidiary B

Company C

7/23/2019 Divest 2001

4/48

Divestitures "#$

Company !%o subsidiary B

&ld Sub B

Company C

Cash, securities or assets asconsideration

7/23/2019 Divest 2001

5/48

'eatures o divestitures

Selling corporation typically receivesconsideration or the assets sold cash securities other assets

Divestitures are typically ta(ableevents or selling corporation "ne!basis or purchaser$

7/23/2019 Divest 2001

6/48

Spin ofs

Typically parent corporationdistributes on pro rata basis, all the

shares it o!ns in subsidiary to itso!n shareholders)

*o money generally changes hands

*on ta(able event as long as it +umps through substantial

hoops

7/23/2019 Divest 2001

7/48

Spin ofsCompany !ithout Subsidiary B

Subsidiary B

Shareholders o!n shares o combined company) &!n the euity in subsidiary implicitly)

7/23/2019 Divest 2001

8/48

7/23/2019 Divest 2001

9/48

7/23/2019 Divest 2001

10/48

7/23/2019 Divest 2001

11/48

7/23/2019 Divest 2001

12/48

7/23/2019 Divest 2001

13/48

7/23/2019 Divest 2001

14/48

7/23/2019 Divest 2001

15/48

7/23/2019 Divest 2001

16/48

7/23/2019 Divest 2001

17/48

7/23/2019 Divest 2001

18/48

Stock price reaction to sell

of Statistically positive response "Table

30)2 in ?aughn$, but small

/re5sell of perormance iscontradictory

?ood perormance, may be leakage /oor perormance, may be reason or

restructuring

/ost5sell of perormance o parent Contradictory "@ain vs) Alein in Aaiser$

7/23/2019 Divest 2001

19/48

6otives or divestiture Aaplan and eisbach

Change o ocus or corporate strategy "$

7nit unprotable or mistake "##$ Sale to pay of leveraged nance "#=$ ntitrust "#$ *eed cash "$ Deend against takeover "3$ ?ood price "$Total "30$

7/23/2019 Divest 2001

20/48

Deensive divestitures

Company is !orried about being takenover

sells 9cro!n +e!els: so they

7/23/2019 Divest 2001

21/48

DivestituresE government

reuirements n acuisition by company C o

company "!hich o!ns company

B$ Company B and Company C may

represent an antitrust problem

Buy company agreeing to divestcompany B

7/23/2019 Divest 2001

22/48

Divesting business unit to

managers ll the above reasons are possible

Fess bureaucracy, may no longer

t corp strategy

Feveraged buyout benets as !ell

Can you get this !ith spin ofs8

7/23/2019 Divest 2001

23/48

Divestiture vs) other

restructuring .n divestiture is that buyer pays cash "usually$

or the !hole sub)

Depends on price) . the price "ater ta($ isbetter than spin of results, then sell) "6aydepend on strategic interests$)

.n divestiture, parent no longer controls)

.n divestiture, parent stuck !ith liabilitiesbuyer doesn

7/23/2019 Divest 2001

24/48

Bad bidders become good

targets8 Aaplan and eisbach

#H3 large acuisitions completed 3=H35

3=># 1 divested by 3=># Diversication acuisitions our times more

likely to be divested

6itchell and Fehn Companies !ith 9negative: responses to

acuisitions tend to divest more reuently

Become takeover targets more reuently

7/23/2019 Divest 2001

25/48

nalysis .s division !orth more to you or to

buyer8

/resent value o operating ree cash Io!sat divisional CC Fess divisional 9debt: liabilities going !ith

buyer Compare !ith the ater5ta(, ater5ees

divestiture proceeds Strategy value o keeping%divesting8

7/23/2019 Divest 2001

26/48

Buyers o acuired units .n contrast to acuirers o public

companies Buyer

7/23/2019 Divest 2001

27/48

Spin ofs

7/23/2019 Divest 2001

28/48

7/23/2019 Divest 2001

29/48

Reuirements or Ta(5ree

Distributions Section 22 o .RC, 9Distributions

o stock and securities o a

controlled corporation: 9transaction not used principally as

device or distribution o earnings andprotJ,: .)e) a valid business purpose

active business reuirement is met all o the stock o the controlled

corporation is distributedK

7/23/2019 Divest 2001

30/48

.RS ?uidelines or Spinofs

?enerally acceptable businesspurposesE

provide an euity interest to employees acilitate primary stock ofering

acilitate a borro!ing

cost savings, t and ocus, competition

acilitate a ta( ree acuisition o the parent"6orris Trust transaction$

Risk reduction

7/23/2019 Divest 2001

31/48

hat

7/23/2019 Divest 2001

32/48

Spin ofs in 3==0

7/23/2019 Divest 2001

33/48

Spin of studies &lder studies "Aaiser$

Some evidence o pre5spin of postiveperormance "3>1, 6iles and Roseneld$

/ositive reaction on average "#1$ *ot due to !ealth redistribution rom bondholders

on average "6arriott8$ Farger spin ofs O larger 1 price reaction

Cusatis, 6iles and oolridge /ost spinof positive perormance both or parent

and subsidiary Both more active in takeovers

7/23/2019 Divest 2001

34/48

Spun of entity

perormance &n average, very good perormance@ust correcting or value losses rom

earlier acuisitions8 *ot all spun of companies are stars

6%.mation

.nterco%Converse G 'lorsheim llen ?roup%Trans/ro .nc) Ralston /urina%Ralcorp Noldings

7/23/2019 Divest 2001

35/48

Some recent spin ofs /epsi%Tricon

/epsi originally !anted to establish a captive channel orountain beverage business, but ound they needed toalleviate competitive barriers to e(panding that business"many more restaurant chains$

hitman Corporation%Nussman%6idas Conglomerate discount, conIicts among management o

divisions *o synergies bet!een bottlers%heavy industry%auto

service R@R%*abisco Noldings

Tobacco litigation, discounting ood company Carl .cahn, Bennet Febo!

7/23/2019 Divest 2001

36/48

No! can spin ofs

generate money orparent8 Borro! at the sub level and

dividend to parent pre spin of

Borro! money sole recourse tosub, proceeds go to parent

'raudulent conveyance problem8

Do a carve out rstE internet subs

7/23/2019 Divest 2001

37/48

Ta( treatment o carve

outs *o shareholder ta(, usually

. selling ne!ly issued sub shares,

then non ta(able . selling shares o!ned by parent,

then ta(able on gain;

hy do the latter8 /roduce income8 von @apan "3=>H$, 7S?8

7/23/2019 Divest 2001

38/48

7/23/2019 Divest 2001

39/48

7/23/2019 Divest 2001

40/48

Targeted stock

Special class o common stock designedto provide euity return linked to

operating perormance o a distinctbusiness unit "targeted business$

Splits company

7/23/2019 Divest 2001

41/48

Target stock vs) spin of

Spin of creates euity osubsidiary, but subsidiary is no longer o!ned by, or

controlled by the management oparent company

ne! spun of stock has no euityclaim on the assets or cash Io!s othe old parent company

7/23/2019 Divest 2001

42/48

7/23/2019 Divest 2001

43/48

7/23/2019 Divest 2001

44/48

'eatures o target stock

Reduces, but does not eliminate,cross5subsidiPation o business units

*o legal separation or transer oassets rom corporation to sub

Target stock structure does not alter

board or director composition ormgmt control o the corp

7/23/2019 Divest 2001

45/48

'eatures o target

common 'eatures in each target share have to

be decidedE

*otional allocation o debt, other assetsand liabilities

No! !ill +oint costs be allocated8 /ro(y statement describing amendments

to corporate charter, shareholder votere

*on ta(able event

7/23/2019 Divest 2001

46/48

Distribution o target

shares /ro rata stock dividend paid to e(isting

holders

Sell target shares to ne! publicinvestors, !ith remainder held by parent proceeds retained by sub proceeds allocated else!here in company

Shares issued in acuisition o targetcompany

7/23/2019 Divest 2001

47/48

Cash Io! rights

Dividend policy sub+ect to discretion oboard

9vailable dividend amount: (ed dollar level ad+usted over time to net

income, dividends or other distributions

(ed as 1 o target business net income

attributable to Targeted shareholders

Same limits on dividends as usual

7/23/2019 Divest 2001

48/48

Qoting rights

'loating voting rights proportional to market value o underlying

business

sset disposition and liuidation rights in liuidation o corporation, distribution to

shares !ould be in proportion to market

value i the parent sells the sub, net proceeds can

be paid to target, or can e(change or targetshares