Chapter 15: Alternative Exit and

Restructuring Strategies
Chapter Summary and Learning Objectives
he intent !" this chapter is t! discuss #hy parent c!rp!rati!ns may ch!!se t! exit certain
businesses$ h!# this may be achieved$ and h!# such acti!ns a""ect shareh!lder value%
Chapter 15 Learning Objectives: To provide students with an understanding of
1% &!tives "!r exiting businesses'
(% )ivestitures'
*% Spin+!""s'
,% Split+ups'
5% E-uity carve+!uts'
.% rac/ing$ target$ !r letter st!c/s'
0% Split+!""s'
1% 2!luntary li-uidati!ns !r bust+ups'
Learning Objective 1: Motives for exiting businesses
Changing c!rp!rate strategy !r "!cus
3nderper"!rming businesses
Regulat!ry c!ncerns
Lac/ !" "it #ith c!re business
ax c!nsiderati!ns
)esire t! raise "unds
A business is #!rth m!re t! !thers
Ris/ reducti!n
1
Learning Objective 2: Divestitures
)ivestitures: Sale !" a p!rti!n !" the "irm t! an !utside party generally resulting in a cash
in"usi!n t! the parent%
)eciding #hen t! sell: he parent
++Estimates a"ter+tax cash "l!#s !" the divisi!n vie#ed !n a standal!ne basis$ care"ully
c!nsidering dependencies #ith !ther !perating divisi!ns'
++)etermines the divisi!n4s disc!unt rate given the characteristics !" its industry'
++Calculates the 52 !" the divisi!n t! pr!vide an estimate !" the mar/et value !" the divisi!n
as i" it #as an independent !perating unit'
++Calculates the value !" the divisi!n as part !" the parent by deducting the mar/et value !"
the divisi!n4s liabilities' and
--)ecides t! sell !r retain the divisi!n by c!mparing the mar/et value !" the divisi!n minus its
!perating liabilities #ith the a"ter+tax pr!ceeds !" the sale !" the divisi!n%
ax and acc!unting c!nsiderati!ns
++)ivesting "irm re-uired t! rec!gni6e gain !r l!ss "!r "inancial rep!rting purp!ses e-ual t!
di""erence bet#een pr!ceeds "r!m sale and the asset4s b!!/ value
++7!r tax purp!ses$ the gain !r l!ss is the di""erence bet#een the pr!ceeds and the parent4s tax
basis%
Learning Objective : !pin"Offs
Spin+!""s: 8e# legal entity created and ne# shares are issued$ but they are distributed t!
st!c/h!lders !n a pr!+rata basis such that the st!c/h!lder base in the ne# c!mpany is the
same as the !ld c!mpany%
++Subsidiary bec!mes a publicly traded c!mpany%
++8! cash in"usi!n t! the parent%
Acc!unting and tax c!nsiderati!ns
++9" pr!perly structured$ generally n!t taxable
++7!r "inancial rep!rting purp!ses$ parent "irm sh!uld acc!unt "!r spin+!"" #ith n! gain !r l!ss
t! the "irm
(
Learning Objective #: !p$it"ups
Split+ups inv!lve creating a ne# class !" st!c/ "!r each !perating unit$ spinning the st!c/ t! the
parent4s shareh!lders$ and diss!lving the remaining c!rp!rate shell
Learning Objective 5: %&uit' carve"outs
:asic "!rms: 9nitial public !""ering and subsidiary e-uity carve+!ut
9nitial public !""ering
++5r!vides cash in"usi!n t! parent$ #hich may be retained by parent !r returned t!
shareh!lders
Subsidiary e-uity carve+!ut
++9ssues a p!rti!n !" an existing subsidiary !r ne#ly "!rmed subsidiary t! the public
++Raises cash #hich can be retained by parent$ returned t! shareh!lders$ !r reinvested in the
Subsidiary
++Enables valuati!n !" the subsidiary$ pr!vides st!c/ "!r m!tivating subsidiary managers$ and
currency "!r subsidiary ac-uisiti!ns
++Shareh!lder base !" the subsidiary may be di""erent than that !" the parent as a result !" the
public sale !" e-uity%
Staged transacti!ns:
++E-uity is s!ld t! the public in stages$ either "r!m a subsidiary !r "r!m the parent t! establish
a mar/et price "!r the st!c/%
++Once mar/et established "!r st!c/$ the remainder !" the st!c/ is s!ld t! the public%
++Alternatively$ the parent may ch!!se t! spin+!"" its remaining shares in the subsidiary t! the
parent4s shareh!lders as a dividend%
Learning Objective (: Trac)ing* targeted* or $etter
argeted st!c/: A "irm4s !perati!ns are split int! multiple issues !" c!mm!n st!c/' h!#ever$
businesses remain #h!lly !#ned subsidiaries !" the parent% ;e%g%$ <&=E)S>
Each targeted st!c/ is regarded as c!mm!n st!c/ !" the c!ns!lidated c!mpany and n!t !" the
subsidiary%
Advantages include:
++9nvest!rs are pr!vided #ith a ?pure play%@
*
++5r!vides alternative types !" ac-uisiti!n currency$
++St!c/+based management incentive pr!grams can be c!nstructed "!r each !perati!n%
5rimary disadvantage is the c!n"lict am!ng business units !n c!st all!cati!ns and internal
trans"er pricing%
Learning Objective +: !p$it"offs
A variati!n !" a spin+!"" in #hich s!me parent "irm shareh!lders receive shares in a subsidiary
in return "!r relin-uishing their parent "irm shares%
Split+!""s increase parent earnings per share by reducing the number !" shares !utstanding and
reduce price pressure !n st!c/ !" ?split+!""@ unit as th!se parent shareh!lders #illing t!
surrender their parent st!c/ "!r this st!c/ are less li/ely t! sell it%
Learning Objective ,: -o$untar' $i&uidations or bust"ups
&anagement believes that the sale !" the business in pieces #ill result in a greater return t!
shareh!lders than the c!ntinuati!n !" the c!mbined entity%
Such a strategy may be initiated #henever management is c!n"r!nted by a pr!xy c!ntest "!r
c!ntr!l !r a tender !""er t! buy the "irm and then t! li-uidate it%
Chapter 15 !tud' Test
rue=7alse Auesti!ns:
1% A divestiture al#ays results in a cash in"usi!n t! the parent% rue !r 7alse
(% 9" the a"ter+tax value !" a business is greater than the a"ter+tax value !" the business as a
c!ntinuing !perati!n t! the parent$ it is al#ays appr!priate t! divest the business% rue !r
7alse
*% iming has a maj!r in"luence !n the decisi!n t! sell a business% rue !r 7alse
,% A spin+!"" is a transacti!n in #hich a p!rti!n !" a "irm is s!ld t! the public% rue !r 7alse
5% Subsidiary e-uity carve+!uts are s!metimes used t! value the subsidiary% rue !" 7alse
.% An e-uity carve!ut is s!metimes a prelude t! a divestiture !" the !perating unit% rue !r
7alse
0% rac/ing st!c/s are separate classes !" c!mm!n st!c/ !" the parent c!rp!rati!n% rue !r
7alse
,
1% rac/ing st!c/s may create internal !perating c!n"licts am!ng the parent4s business units
rue !r 7alse
B% 9n general$ a v!luntary bust up has the advantage !ver a merger !" de"erring the
rec!gniti!n !" a gain by the st!c/h!lders !" the selling c!mpany until they eventually sell
the st!c/% rue !r 7alse
1C% )ivestitures and carve!uts !"ten pr!vide cash t! the parent$ #hile spin+!""s d! n!t% rue
!r 7alse
11% 5arent "irms that engage in divestitures are !"ten highly diversi"ied in largely unrelated
industries and have a desire t! achieve greater "!cus t! raise cash% rue !r 7alse
1(% he parent "irm generally retains c!ntr!l !" the business inv!lved in an e-uity carve+!ut%
rue !r 7alse
1*% 2!luntary bust+ups !r li-uidati!ns by the parent "irm re"lect management4s judgment that
the sale !" individual parts !" the "irm c!uld reali6e greater value than the value created by
a c!ntinuati!n !" the c!mbined c!rp!rati!n% rue !r 7alse
1,% )ivestitures$ spin+!""s$ e-uity carve+!uts$ split+ups$ split+!""s$ and bust+ups are c!mm!nly
used strategies t! exit businesses and t! redepl!y c!rp!rate assets by returning cash !r
n!n+cash assets thr!ugh a special dividend t! shareh!lders% rue !r 7alse
15% 9n a public s!licitati!n$ a "irm can ann!unce publicly that it is putting itsel"$ a subsidiary$ !r
a pr!duct line up "!r sale% Either p!tential buyers c!ntact the seller !r the seller actively
s!licits bids "r!m p!tential buyers !r b!th% rue !r 7alse
&ultiple Ch!ice Auesti!ns:
1.% Dhich !" the "!ll!#ing is generally n!t c!nsidered a strategy "!r exiting a businessE
a% A spin+!""
b% A divestiture
c% An ac-uisiti!n
d% An e-uity carve!ut
10% Dhich !" the "!ll!#ing are c!mm!n reas!ns "!r exiting a businessE
a% Regulat!ry c!ncerns
b% Changing c!rp!rate strategy !r "!cus
c% Lac/ !" "it
d% All !" the ab!ve
11% A spin+!"" may create shareh!lder #ealth "!r all !" the "!ll!#ing reas!ns except "!r
a% Spin+!""s are generally n!t taxable i" pr!perly structured
b% he spin+!""4s management and b!ard is independent !" the "!rmer parent
5
c% he c!st !" capital !" the spin+!"" is generally higher than #hen it #as part !" the
parent
d% he spin+!"" may be subse-uently ac-uired by an!ther "irm
1B% Dhich !ne !" the "!ll!#ing is generally n!t a reas!n "!r issuing trac/ing st!c/sE
a% ! give invest!rs a ?pure play@ in a speci"ic business !#ned by the parent
b% ! enhance the li/elih!!d that the business #ill be ac-uired
c% ! create an incentive "!r management receiving the st!c/
d% ! raise capital "!r the parent !r "!r the business "!r #hich the trac/ing st!c/ is
created
(C% Dhich !" the "!ll!#ing is n!t true !" a spin+!""E
a% Creates cash in"usi!n "!r parent
b% Change in e-uity !#nership !" the spin+!""
c% 8e# shares issued t! the public
d% All !" the ab!ve
Ans#ers t! est Auesti!ns
rue=7alse 1% 7alse
( 7alse
*% rue
,% 7alse
5% rue
.% rue
0% rue
1% rue
B% 7alse
1C% rue
11% rue
1(% rue
1*% rue
1,% rue
15% rue
&ultiple Ch!ice 1.% C
10% )
11% C
1B% :
(C% )
.