Asset Sales
Sale of division or other assets to another firm, usually for cash
example:
Quaker sold Snapple to Triarc (1997)
Astra Zeneca sold Movantik to RedHill (2020)
Equity carve-out
Public offering of full or partial interest in subsidiary creating new firm with at least some autonomy
example
Pharmacia carved out 14% of Monsanto (2000)
KBR carved out 17% of Halliburton (2006)
Spin-off
Pro rata distribution of subsidiary shares to the existing shareholders of the parent firm, creating a new independent firm
example
Sears spun off Dean Witter Discover (1993)
Baxter spun off Baxalta (2014)
Split-up
Separation of firm into two+ parts, often via spin-off
example:
HP dividing into HP and Agilent (1999)
Kraft Foods separates US grocery from global snacks (2011)
Tracking stock
Creation of new class of stock with value based on cash flows of a division. Used in high growth divisions during dotcom era
example
AT&T offering of AT&T Wireless (2000)
Exchange Offer
Distribution giving shareholders choice between parent and subsidiary stock; creates separate firm
example
Limited’s divestiture of Abercrombie & Fitch (1998)
- Choice between methods should be made with shareholders’ interests in mind, e.g. carve-out is preferable over spinoff if…
– Subsidiary is undervalued (conglomerate discount)
– Parent wants to keep long-term stake in subsidiary e.g. because subsidiary has large growth opportunities
– Equity markets are hot
– Parent company needs cash
key methods of restructuring, examples
- Automobile parts industry
– GM divested Delphi Automotive Systems (1999)
– 17.3% equity carve-out offered in IPO, followed by a spinoff of remainder
– Ford spun off Visteon via a stock dividend ie Ford shareholders received Visteon shares
– These spin-offs ended long traditions of vertical integration in the car industry - Healthcare industry
– Pfizer carved out 20% of its animal pharmaceutical unit Zoetis through an IPO early 2013, raising over $2 billion
– It then made an exchange offer - swap Pfizer stock for remainder of Zoetis shares at a 7 percent discount - heavily over-subscribed
what are the motives for restructuring
Many possible motives for a firm to restructure:
Direct relation between corporate strategy and corporate restructuring. Environmental change.
Corporate focus often cited as restructuring reason, but focused companies also must review strategic alternatives due to market changes.
Firms restructure to remain competitive, to correct mistakes (negative synergies), and to respond to change forces in the economy
Also to increase transparency and monitoring
restructuring and shareholder value:
explain Modigliani, miller and irrelevance
– If there are no transaction or information costs, corporate organization is irrelevant. Value determined by assets rather than financial doctoring.
– Managers cannot improve value by chopping firm into pieces. The market cannot be fooled.
– Theory guides analysis of restructuring toward factors such as information and transactions costs as possible sources of shareholder value creation
restructuring and shareholder value. make 3 points
- Incentive structure of the firm and monitoring of teams.
Monitoring of inputs performed by residual claimants ie shareholders. But these monitoring costs limit the size of the firm and require contracts to incentivise agents
Value creation – divestiture may improve managerial incentives and improve monitoring by the market. - Informational asymmetries.
Managers know more than shareholders. Their actions convey information.
Value creation – equity carve out indicates that company has chosen to raise cash by not issuing its own shares. Signal of undervaluation - Transactions costs
Technological/Environmental change alters relative costs of internal/market organisation
Value creation – divestiture is a response to costs of internal organisation (make) being higher than contracting through the market (buy)
Empirical results on corporate restructuring Sources of wealth gains
Studies of restructuring often find the larger the divestiture, the larger the announcement return
- Positive returns to BOTH buyer and seller indicate that asset sales likely represent efficient redeployment of assets
- Further tests of Information vs. Efficiency
– Unsuccessful asset sales lose gains from announcement
– Efficiency (Hite et al, 1987)
– Announcement causes negative stock returns to competitors
– Efficiency (Hulburt et al, 2002)
3 points from Empirical results on corporate restructuring Sources of wealth gains, brief
Larger divestitures result in larger announcement returns.
Positive returns for both buyer and seller indicate efficient asset redeployment.
Testing for Information vs. Efficiency.
Corporate focus possible source of gains:
executives may be better able to monitor and run firm with narrow scope
