Chapter 11: Restructuring and Divestitures

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Chapter 11 Restructuring and Divestitures

• Prof. Stephen Y. L. Cheung
• Department of Economics Finance
• City University of Hong Kong

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Corporate Restructuring Strategies

• Some basic forces
• Align interests between managers and shareholders
  agency problem
• Move assets to higher uses
• Reverse conglomerate merger movement

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• Definitions
• Divestitures sale of segment of a company to a
  third party
• Spin-offs company distributes on a pro rata
  basis all shares it owns in a subsidiary to its
  own shareholders
• Split-ups two or more new companies come into
  being in place of original company

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• Equity carve-outs some of subsidiary's shares
  are offered for sale to general public
• Split-offs some shareholders receive
  subsidiary's shares for their parent company
  shares

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Types and Definitions of Restructuring and
Divestiture Methods
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Types and Definitions of Restructuring and
Divestiture Methods
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Diverse Motives for Divestitures

• Sale of older product lines because of changing
  opportunity sets
• Dismantling segments of conglomerates which had
  higher values as independent operations or better
  fit with other firms

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• Change in strategic focus which may reflect
  realignment with firm's changing environments
• Adding value by selling into a better fit
• Firm is unable or unwilling to make additional
  investments to remain in a business

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• Harvesting past successes to make resources
  available for developing other opportunities
• Discarding unwanted businesses from prior
  acquisitions to value-increasing buyer
• Divestiture to finance major acquisitions or LBOs
• Warding off takeovers as a defense by selling off
  a "crown jewel"

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• Divestiture to obtain government approval of a
  combination of segments with competing products
• Corporate sale of divisions or business units to
  operating managements
• Divestiture to finance taking a position in
  another firm
• Divest businesses after learning more about them
• Reversing prior mistakes

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Examples of Restructuring and Divestitures ATT
Corporation
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Examples of Restructuring and Divestitures ATT
Corporation
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Examples of Restructuring and Divestitures ATT
Corporation
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Event Returns

• Buyers returns are not statistically
  significant
• Sellers
• Positive gains related to size of spin-off
• Positive gains if proceeds paid out to
  shareholders

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• Kaplan and Weisbach (1992)
• Sample of 271 acquisitions between 1971 and 1982
• By 1989, 119 had been divested median holding
  period of seven years
• Relatedness
• 60 of acquisitions in which acquirer and target
  are unrelated have been divested
• Fewer than 20 of highly related acquisitions
  have been divested

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• Gains and losses on divestitures
• 44 of acquirers report loss on sale
• 56 report gain or no loss
• Comparison of sale price to purchase price of
  divested unit
• Most units sold for more than they cost
• Sale price averages 143 of target's pretakeover
  market value
• Deflated by SP 500, average price of divested
  units is 90 of purchase price
• Acquisitions that ultimately prove unsuccessful
  are considered poor investments by the market
  when they are made unfavorable event returns

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Rationale for Divestitures

• Assets are worth more as part of buyer's
  organization than as part of seller's
• Assets are actively interfering with other
  profitable operations of seller negative synergy

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• Value gains result from improved management of
  assets remaining after divestiture attributed
  to increased focus
• Better fit between buyer and divested division
• Gains to divestitures (1-2) smaller than for
  spin-offs (3-5) divestitures mostly smaller
  fraction of parent than spin-offs