Restructuring and Divestitures

Corporate Restructuring Strategies

General framework of corporate restructuring
Asset management
Acquisitions Sell-offs or divestitures

Ownership relationships
Spin-offs Split-up Equity carve-outs

 Reorganizing financial claims

Exchange offers Dual-class recapitalizations Leveraged recapitalizations Financial reorganization (bankruptcy) Liquidation Joint ventures ESOPs and MLPs Going-private transactions International markets Share repurchase programs

Other strategies

 Some basic forces

Need to meet global competition Align interests between managers and shareholders agency problem Move assets to owners who can utilize them more efficiently

 Definitions
Divestiture
Sale of segment of a company to a third party Sale for cash or securities or some combination thereof Assets revalued for purpose of future depreciation by the buyer

 Spin-off
Company distributes on a pro rata basis all shares it owns in a subsidiary to its own shareholders Two separate public corporations with initially same proportional equity ownership now exist No money changes hands Subsidiary's assets are not revalued Transaction treated as a stock dividend Transaction is a tax-free exchange

 Equity carve-outs
Some of subsidiary's shares are offered for sale to general public Bring infusion of cash to parent firm without loss of control Often sell up to 20% in IPO, later spin off of remainder of shares

Split-ups
Two or more new companies come into being in place of original company Usually accomplished by spin-offs

Diverse Motives for Divestitures

Dismantling segments of conglomerates which had higher values as independent operations or better fit with other firms Sale of original business due to changing opportunities or circumstances

 Change in strategic focus which may reflect realignment with firm's changing environments Adding value by selling into a better fit Firm is unable or unwilling to make additional investments to remain in a business Harvesting past successes to make resources available for developing other opportunities

 Discarding unwanted businesses from prior acquisitions to value-increasing buyer Divestiture to finance major acquisitions or LBOs Divestiture used as a takeover defense by selling off "crown jewel" Divestiture to obtain government approval of a combination of segments with competing products

 Corporate sale of divisions or business units to operating managements Divestiture of unrelated divisions to focus on core businesses Divestiture of low margin product lines to improve margins and profitability Divestiture to finance another firm Divestiture to reverse prior mistakes Divestiture of businesses after learning more about them

Rationale for Divestitures

Boot (1992)
Divestitures are a commonly observed post-takeover initiative Target firm's management did not divest earlier because divestitures would represent admissions of earlier unwise decisions

 Cho and Cohen (1997)

Well performing operating units may partially hide poor performance of other units When other units begin to underperform industry peers, sale of poorly performing units are triggered

 Berger and Ofek (1996)

Firms with largest diversification discount or value losses are likely to become takeover targets Extent of post-takeover bustup sales activity is positively related to the size of diversification discount Divested divisions in post-takeover bustups are generally purchased and become part of a focused, stand-alone firm

 Linn and Rozeff (1984) (LR)

Valid reasons for divestitures
Assets are worth more as part of buyer's organization than as part of seller's Assets are actively interfering with other profitable operations of seller

Gains to divestitures (1-2%) smaller than for spin-offs (3-5%)

May reflect poor performance prior to divestiture (LR rejected this rationale) May reflect that divestitures are smaller in scale May reflect managerial incentive factor

 John and Ofek (1995)

Value gains result from improved management of assets remaining after divestiture
Attributed to increased focus Decrease in number of reported lines of business

75% of divested divisions are unrelated to core activities of seller Supports hypothesis that better fit between buyer and divested divisions accounts for some of value gain