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Divestiture

Definition of 'Divestiture'

The partial or full disposal of an investment or asset throughsale, exchange, closure or bankruptcy. Divestiture can be done slowlyand systematically over a long period of time, or in large lots over a

short time period.

'Divestiture'

For a business, divestiture is the removal of assets from thebooks. Businesses divest by the selling of ownership stakes,

the closure of subsidiaries, the bankruptcy of divisions etc.

In personal finance, investors selling shares of a business can be saidto be divesting their interests in the company being sold.

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Corporate Control It refers to the authority to make the decisions of a corporation

regarding operations and strategic planning, including capitalallocations, acquisitions and divestments, top personnel decisions,and major marketing, production, and financial decisions. Thisconcept is frequently applied to publicly traded companies, whichmay be susceptible to changes in corporate control when large

investors or other companies seek to wrest control from managersor other shareholders.

The notion of corporate control is similar to that of corporategovernance; however, it is usually used in a narrower sense.Corporate control is concerned with who hasand, moreover, who

exercisesthe ultimate authority over significant corporatepractices. Governance, by contrast, involves the broader interworkings of the day-to-day management, the board of directors, theshareholders at large, and other interested parties to formulate andimplement corporate strategy.

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Corporate Control Premium buy-backs: represent the repurchase of a substantial stockholders

ownership interest at a premium above the market price.

What is a share buyback ?

A repurchase of outstanding shares from investors in the open market by acompany using its surplus cash within a stipulated time frame. Shares are boughtback at their prevailing market prices or at a premium to market price, but not

exceeding the maximum buyback price. Why do companies buy back shares?

In order to stabilise the share price by buying it at a premium to market price andreducing the number of shares in the market. It also improves the financial ratiosof the company. On the other hand, a buyback increases the promoter holding inthe company and eliminates a takeover threat from major shareholders.

How does it benefit the company? By reducing the number of outstanding shares, the financial ratios look better.

First, the return on equity (ROE) and the earnings per share (EPS) go up,resulting in improvement of the price-to-earning ratio (PE). Buybacks also reducethe cash on balance sheet and hence the assets. As a result, return on assets(ROA) actually increases.

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What does it mean for investors?

Buybacks are used by companies to return surplus cash to shareholders orprovide support for the share price during periods of temporary weakness.

What are the recent changes proposed by the market regulator? SEBI has proposed significant changes to existing framework for buyback of

shares by companies from open market, that require the process be tocomplete in three months and minimum repurchase to be 50 per cent of thetarget. The proposals are primarily aimed at ensuring that only seriouscompanies launch a share buyback programme, which in turn would help inprotecting the interest of investors.

The market regulator has proposed to make it mandatory for companies tobuy back a minimum of 50 per cent shares of the total targeted amount whilethe repurchase programme should be completed in three months from thelaunch date. At present, the period of share buyback is 12 months, it isproposed that companies complete the buy back in three months. To ensure

that only serious companies launch the buyback programme, it is furtherproposed that these companies be mandated to put 25 per cent of themaximum amount proposed for buy back in an escrow account.

(Jan 02, 2013)

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A standstill agreement is usually an instrument of a hostile takeoverdefense, in which an unfriendly bidder agrees to limit its holdings ofa target firm.

Standstill agreement: written in connection with such buy-backs. Itrepresents a voluntary contract in which the stockholder who isbought out agrees not to make further attempts to take over thecompany in the future. When a standstill agreement is made withouta buy-back, the substantial stockholder simply agrees not toincrease his or her ownership which presumably would put him or

her in an effective control position. Antitakeover amendments:

These are changes in the corporate bye laws to make an acquisitionof the company more difficult or more expensive. These include:

(1) supermajority voting provisions- requiring a high percentage of

stockholders to approve a merger (eg. 80%)(2) staggered terms for directors which can delay change of controlfor a number of years

(3) golden parachutes, which award large termination payments toexisting management if control of the firm is changed andmanagement is terminated.

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Proxy contests: an outside group seeks to obtain representation onthe firms board of directors. The outsiders are referred to as

dissidents or insurgents, who seek to reduce the control position ofthe incumbents or existing board of directors. Since the

management of a firm often has effective control of the board ofdirectors, proxy contests are usually regarded as directed againstthe existing management.

Changes in ownership structure:

1. Exchange offer: it may be the exchange of debt or preferred stockfor common stock, or conversely, of common stock for the moresenior claims. Exchanging debt for common stock increaseleverage; exchanging common stock for debt decreases leverage.

2. Share repurchase: the corporation buys back some fraction of its

outstanding shares of common stock. The percentage of sharespurchased may be small or substantial. If substantial, the effect maybe to change the control structure in the firm

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Eg. Teledyne Technologies Incorporated is an industrial conglomerateprimarily based in the United States but with global operations. It wasfounded in 1960, as Teledyne, Inc., by Henry Singleton and GeorgeKozmetsky. It currently operates with four major segments: Digital Imaging,Instrumentation, Engineered Systems, and Aerospace and DefenseElectronics. The substantial share repurchase activity by Teledyne Inc.increased the effective control position of Mr. Singleton, the chairman and theCEO of the company. The company purchased shares from othershareholders, but Mr. Singleton did not reduce his already substantialholdings. The fixed holdings of Mr. Singleton thereby became a largerpercentage of the new reduced company total.

In late 1994, Teledyne was subjected to a hostile takeover attempt by WHXCorporation. This was successfully challenged, but the Teledyne pensionfund had a surplus of $928 million and this was of wide interest. To forestallfurther hostile takeovers, Allegheny Ludlum, a steel and specialty metal firm,offered to serve as a white knight friendly acquirer. On 15 August 1996, anagreement was reached to merge Teledyne with Allegheny Ludlum, forming

Allegheny Teledyne, Inc. (ATI), with headquarters in Pittsburgh,Pennsylvania.

After some reorganization, ATI operated with three segments: Aerospace andElectronics, Specialty Metals, and Consumer Products. The former Teledynehigh-technology companies were mainly in the A&E Segment, led by RobertMehrabian. ATI eventually decided to spin off the segments into independententities, and on 29 November 1999, Teledyne Technologies Incorporated,

Allegheny Technologies Incorporated, and Water Pik Technologies, Inc., wereformed.

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3. Going private: in this transaction, the entire equity interest in apreviously public corporation is purchased by a small group ofinvestors. These transactions typically include members of the

incumbent management group who obtain a substantial proportionof the equity ownership of the newly private company. When thetransaction is initiated by the incumbent management, it is referredto as a management buy-out: MBO. Usually, a small group ofoutside investors provides funds and typically, securesrepresentation on the private companys board of directors. These

outside investors also arrange other financing from third partyinvestors. When financing from third parties involves substantialborrowing by the private company, such transactions are referred toas Leveraged buy-outs: LBO.

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Examples of JV Sony-Ericsson is a joint venture by the Japanese consumer electronics

company Sony Corporation and the Swedish telecommunications companyEricsson to make mobile phones. The stated reason for this venture is tocombine Sony's consumer electronics expertise with Ericsson's technologicalleadership in the communications sector. Both companies have stoppedmaking their own mobile phones.

Virgin Mobile India Limited is a cellular telephone service provider companywhich is a joint venture between Tata Tele service and Richard Branson'sService Group. Currently, the company uses Tata's CDMA network to offer itsservices under the brand name Virgin Mobile, and it also has GSM servicesin some states.

SBI and Airtel join hands to usher in a new era of financial inclusion forunbanked India in 2011.

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