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7/23/2019 Divest 2001
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Dening divestitures
Selling assets, divisions,subsidiaries to another corporation
or combination o corporations orindividuals
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Divestitures
Subsidiary B
Company !ithout Subsidiary B
Company C
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Divestitures "#$
Company !%o subsidiary B
&ld Sub B
Company C
Cash, securities or assets asconsideration
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'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$
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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
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Spin ofsCompany !ithout Subsidiary B
Subsidiary B
Shareholders o!n shares o combined company) &!n the euity in subsidiary implicitly)
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Stock price reaction to sell
of Statistically positive response "Table
30)2 in ?aughn$, but small
/re5sell of perormance iscontradictory
?ood perormance, may be leakage /oor perormance, may be reason or
restructuring
/ost5sell of perormance o parent Contradictory "@ain vs) Alein in Aaiser$
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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 "$Total "30$
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Deensive divestitures
Company is !orried about being takenover
sells 9cro!n +e!els: so they
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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
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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
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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$)
.n divestiture, parent no longer controls)
.n divestiture, parent stuck !ith liabilitiesbuyer doesn
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Bad bidders become good
targets8 Aaplan and eisbach
#H3 large acuisitions completed 3=H35
3=># 1 divested by 3=># Diversication acuisitions our times more
likely to be divested
6itchell and Fehn Companies !ith 9negative: responses to
acuisitions tend to divest more reuently
Become takeover targets more reuently
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nalysis .s division !orth more to you or to
buyer8
/resent value o operating ree cash Io!sat divisional CC Fess divisional 9debt: liabilities going !ith
buyer Compare !ith the ater5ta(, ater5ees
divestiture proceeds Strategy value o keeping%divesting8
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Buyers o acuired units .n contrast to acuirers o public
companies Buyer
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Spin ofs
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Reuirements or Ta(5ree
Distributions Section 22 o .RC, 9Distributions
o stock and securities o a
controlled corporation: 9transaction not used principally as
device or distribution o earnings andprotJ,: .)e) a valid business purpose
active business reuirement is met all o the stock o the controlled
corporation is distributedK
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.RS ?uidelines or Spinofs
?enerally acceptable businesspurposesE
provide an euity interest to employees acilitate primary stock ofering
acilitate a borro!ing
cost savings, t and ocus, competition
acilitate a ta( ree acuisition o the parent"6orris Trust transaction$
Risk reduction
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hat
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Spin ofs in 3==0
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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
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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
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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!
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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
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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$, 7S?8
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Targeted stock
Special class o common stock designedto provide euity return linked to
operating perormance o a distinctbusiness unit "targeted business$
Splits company
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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
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'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
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'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
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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
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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
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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