BUSI 536 - Module 6 - Homework 3.docx

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Running header: Homework 3 1 M&A Discussion Questions Liberty University BUSI 536-D01: Mergers & Acquisitions March 31, 2019
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Homework 3 2 1. What is the difference between a spin-off, an equity carve-out, and a divestiture? According to the textbook, a spin-off is a separate company, owned by the shareholders of the parent company, according to their share structure [Pat18]. Therefore, the spun-off entity becomes a separate business, entirely independent of the parent company. When it comes to equity carve-outs, the textbook suggests that those are subsidiaries established by the parent company. That allows it to retain management control while raising capital by offering a maximum 50% of its shares to the market [Pat18]. Furthermore, the divestiture is the process of a parent company selling a division to another organization [Pat18]. According to Picardo [Elv18], the carve-out requires an Initial Public Offering (IPO) while it can maintain a tax-free status if no more than 20% of the shares become available to the market. While all three methods focus on maximizing the shareholder value, they follow different paths to the end zone. Both the spin-off and carve-out are methods a parent company can follow to divest its asset(s). Each has different tax implications and allows different ownership structure for the parent company. In the case of divestiture, the parent company must find a buyer for its asset. 2. What caused the increase in divestitures during the 1970s? According to the textbook, the divestiture activities of the 1970s was the effect of the merger wave of the 1960s [Pat18]. While companies tried to explode their stock prices through acquisitions, the downturn of the stock market forced to the rethink that plan. Therefore, they began a divestitures journey, getting rid of the merging entities that were not performing as planned. Volunteer divestitures boosted its (Kutscher, 2014)
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Homework 3 3 volume during the 1970s because the markets welcome new management strategy. Such ventures showed the market that the organization was changing direction and applauded such efforts, as there were positive returns of such moves [Pat18]. Eventually, organizations had to begin removing the fat and focus on growing their core businesses. 3. Discuss two reasons for voluntary divestitures. According to the textbook, there are few reasons behind the voluntary divestitures. The first one we will discuss is the poor strategic fit. When the parent company wishes to move out of a market segment or business line, it packages and sells its asset(s) [Pat18]. That is typically welcomed by the markets, as it shows that the management team is continuing its efforts to build shareholder value. GE currently follows this plan as it has found itself at a dead-end and in need of capital. While it developed an extensive M&A process during the era of Jack Welch, it has now found itself at the opposite side of the spectrum.
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