The split off was effected through the exchange offer

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was completed on December 23, 2009. The split-off was effected through the exchange offer of previ- ously held 170 million shares of Mead Johnson, after converting its Class B common stock to Class A common stock, for 269 million outstanding shares of the Company's stock resulting in a pre-tax gain of $7,275 million, $7,157 million net of taxes. The shares received in connection with the exchange were valued using the closing price on December 23,2009, of $25.70 and reflected as treasury stock. The gain on the exchange was determined using the sum of the fair value of the shares received plus the net deficit of Mead Johnson attributable to the Company less taxes and other direct expenses related to the transaction, including a tax reserve of $244 million which was established. ':."roman accounting standpoint, the split-off of Mead Johnson is treated like the purchase of treasury ock, using the stock of Mead Johnson to fund the purchase instead of cash (such as exchanging . lead Johnson stock for Bristol-Myers stock). As a result of the transaction, the Treasury Stock ount on Bristol-Myers' balance sheet increased (became more negative) by $6.9 billion (269 million shares X $25.70 per share), which reduced equity by $6.9 billion. This reduction was offset, wever,by the recognition of a gain on the exchange amounting to $7.2 billion after tax. This split- ff was affected by a tender offer with Bristol-Myers shareholders. Consequently, it is a non pro rata exchange and is, therefore, valued at market value with a resulting gain. The net effect on equity is minimal, but the income statement reports a substantial gain for that year. nalysis of Equity Carve-Outs ell-offs, spin-offs, and split-offs all involve the divestiture of an operating segment. Although they are one-time occurrences, they can result in substantial gains that can markedly alter the income statement and balance sheet. Consequently, we need to interpret them carefully. This
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8-27 Module 8 I Equity Recognition and Owner Financing L-T Debt 600,000 CS 198 APIC 599,802 LTD 600,000 I CS I 198 APIC I 599,802 involves learning as many details about the carve out as possible from the annual report, the Management Discussion and Analysis, and other publicly available information, Following an equity carve-out, the parent company loses the cash flows (positive or negative of the divested business unit. As such, the divestiture should be treated like any other discontinued operation. Any recognized gain or loss from divestiture is treated as a nonoperating activity, The sale price of the divested unit reflects the valuation ofjuture expected cash flows by the purchaser and is best viewed as a nonoperating activity, Income (and cash flows) of the divested unit up to the date of sale, however, is part of operations, although discontinued operations are typically segregated.
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