sDivest(48p) - Divestitures, spin-offs and equity...

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Divestitures, spin-offs and equity carve-outs
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Comparison of Strategic Restructuring Alternatives Full independence Pure equity market play One corporation Quasi-pure market play Spin-off New board of directors Stand-alone credit May be tax free No crossover liabilities Full IPO or private sale New board of directors Stand-alone credit May be tax free No crossover liabilities Partial IPO New board of directors Credit support from parent May be tax free No crossover liabilities Targeted stock Same board of directors Consolidated credit Tax free Crossover liabilities Source: Lehman Brothers Degree of corporate integration and control
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Divestitures New funds raised by parent Parent company relinquishes total control of subsidiary Transaction is taxable event to parent SUB $ PARENT BUYER
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Divestitures Many divestitures follow closely after acquisitions Are acquisitions successful if many are quickly divested? Strategy researcher Michael Porter finds that of 33 company histories from 1950-1986, 53% of the acquisitions into new industries were divested Ravenscraft and Scherer find that 33% of 1960s and 1970s acquisitions were later divested.
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Number of divestitures per year 0 500 1000 1500 2000 2500 3000 3500 4000 1985 1987 1989 1991 1993 1995 1997
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Total dollar amount of divestitures per year 0 50000 100000 150000 200000 250000 300000 350000 1985 1987 1989 1991 1993 1995 1997 In millions
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Average size of divestitures 0 10 20 30 40 50 60 70 80 90 100 1985 1987 1989 1991 1993 1995 1997 In millions
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Divestitures 0 500 1000 1500 2000 2500 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 0 10 20 30 40 50 60 Divestitures %ofTransactions
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Divestiture Study
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Empirical evidence on divestitures Average percent of parent divested is 9% Stock price reaction on announcement day is 1.2% Stock price impact from announcement through completion of sale is 2.4% Disclosing price in transaction causes greater impact on price Divestiture of businesses for strategic reasons results in much higher returns to shareholders than divestitures of undesirable, unwanted units Buyers of divested assets earn positive returns (1% on announcement) particularly if asset purchases are related to existing business of acquirer
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Reasons for divestitures
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Reasons for divestitures Overall, firms earn a profit on divestitures Is the profit enough to cover the ‘opportunity cost”? While the return is slightly below a stock portfolio of the S&P 500 held over the same time-frame,it is still positive, and the flexibility may suggest greater advantage to the divestiture than to not have become involved.
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Atlantic Richfield (ARCO) Large domestic integrated oil company with interest in minerals, chemicals and metals January 1984, begins downsizing program Why do you think ARCO is engaging in downsizing? Divests aluminum operations, Texas Chemical division, polypropylene unit in Belguim and ARCO metals division Company states that it is taking move to “confront structural changes in the oil industry and optimally position the company’s
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This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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sDivest(48p) - Divestitures, spin-offs and equity...

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