In some cases particularly when the desired

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In some cases, particularly when the desired divestiture is a relatively large operating unit, companies will elect to do an equity carve-out . To do a carve-out, a parent company first creates a completely separate company of which the parent is the sole shareholder. Next, the parent company arranges an initial public offering (IPO) in which a fraction, perhaps 20 percent or so, of the parent’s stock in the new firm is sold to the public, thus creating a publicly held company. Instead of a carve-out, a company can elect to do a spin-off . In a spin-off, the com- pany simply distributes shares in the subsidiary to its existing stockholders on a pro rata basis. Shareholders can keep the shares or sell them as they see fi t. Very commonly, a company will fi rst do an equity carve-out to create an active market for the shares and then subsequently do a spin-off of the remaining shares at a later date. Many well- known companies were created by this route. For example, insurance giant Allstate was spun off by Sears; Palm Computing was a 3Com spin-off; and Conoco was once a part of Du Pont. In a less common, but more drastic move, a company can elect to do (or be forced to do) a split-up . A split-up is just what the name suggests: A company splits itself into two or more new companies. Shareholders have their shares in the old company swapped for shares in the new companies. Probably the most famous split-up occurred in the 1980s. As the result of an antitrust suit by the Justice Department, AT&T was forced to split up through the creation of seven regional phone companies (the so-called Baby Bells). Today, the Baby Bells survive as companies such as BellSouth, SBC Communications, and Veri- zon. In an unusual turn of events, in 2006, SBC Communications acquired its former parent company, AT&T. In a nod to AT&T’s history and name brand recognition, the new company kept the AT&T name even though SBC was the acquirer. 20
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21 be a taxable merger, whereas a stock exchange will not be taxable. In a taxable merger, there are capital gains effects and asset write-up effects to consider. In a stock exchange, the target firm’s shareholders become shareholders in the merged firm. 3. Accounting for mergers and acquisitions traditionally involved either the purchase method or the pooling of interests method. In 2001, pooling was eliminated as an option. As a result, a merger or acquisition will generally result in the creation of goodwill, but, under the new guidelines, goodwill does not have to be amortized for financial reporting purposes. 4. If Firm A is acquiring Firm B, the benefits ( V ) from the acquisition are defined as the value of the combined firm ( V AB ) less the value of the firms as separate entities ( V A and V B ), or: V V AB ( V A V B ) The gain to Firm A from acquiring Firm B is the increased value of the acquired firm, V , plus the value of B as a separate firm, V B . The total value of Firm B to Firm A, V B * , is thus: V B * V V B
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  • Spring '12
  • Scott
  • Firm, Firm B

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