The rationale behind this transaction is to generate

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- The rationale behind this transaction is to generate cash for the parent without losing control - Parents sells a minority stake in the subsidiary and so maintains control - Transaction generates cash for the parent Spin-Offs - A transaction in which the parent (holding) company distributes, on a pro-rata basis, all the shares it owns in the subsidiary to the company’s existing shareholders - Results in the creation of a new independent, publically traded entity - Shares are distributed to existing shareholders - No cash is generated for the parent - Example – Tiger Brands and Adcock Ingram 4 | P a g e
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Divestitures - The sale of a segments (assets, product line or subsidiary) of the company to a third party for cash or securities - Often divest departments that are no longer profitable Tracking Stocks - Created when a company issues a separate class of shares that track the performance of a specific segment - By holding tracking stock – shareholder can share in the performance of that segment rather than the company as a whole - Voting power is quite limited - Not popular in South Africa Mergers & Acquisitions undertaken to Reorganise Company Ownership Structure - Engage in the following M&A transactions to reorganise the ownership structure of the company: 1.) Share Repurchases 2.) Exchange Offerings 3.) Leveraged Buy Outs 4.) Management Buy Outs 5.) Leveraged Recapitalisations 6.) Employee Share Ownership Plans 7.) Dual-Class Recapitalisation Share Repurchases - Companies repurchase their own shares by means of > a tender offer to existing shareholders > purchasing shares in the open market > negotiated buy back - Allowed in South Africa since 1999 - Rationale is to decrease the number of shares and so increase the earnings per share - Shares are often repurchased a price higher than the market price 5 | P a g e Example (page 49) Company ABX is an all equity firm and has excess cash to the value of R 300 000. They pay no dividends and net profit for the year was R 49 000. There are currently 100 000 shares in issue. Ignore commissions, taxes and other market imperfections. The Market values of assets, equity and liabilities at the end of the previous financial year were: Excess Cash 300 000 Equity 1 000 000 Other Assets 700 000 Debt 0 Total Assets 1 000 000 Total Capital 1 000 000 The total market value of equity = R 1 000 000 The current price per share = 1 000 000/100 000 = R 10 EPS = 49 000/100 000 = R0.49 - To reduce the excess cash the company has two options, either pay a cash dividend and repurchase shares Cash Dividend = R300 000/100 000 = R3 per share Share Repurchase = R300 000/R 10 = 30 000 shares
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- News of a repurchase sends signals to the shareholders and market participants: 1.) The shares are undervalued 2.) The company doesn’t have any profitable projects in which to invest excess cash - Companies may engage in share repurchases to increase company’s leverage and move towards target debt ratio as well as a defence against hostile takeovers Exchange Offers - The right or option to exchange one security for another -
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