Corporate Structure

1
Corporate Structure Deals 1.

• Throughout this course we look at how a business
  is organized as a value driver. A company is a
  nexus of contracts, and management understands
  that the scope of these contracts is important.
• Why would two separate divisions be optimally
  part of the same company?
• When we look at merger justifications, the usual
  suspects are
• Synergies.
• Economies of Scale.
• Strategic Positioning (Relative Bargaining
  strength a la Wal Mart).

2
Whither Synergies

• Of course, most mergers end up being
  ill-conceived, and the imagined synergies never
  materialize. Instead, problems in mixing
  corporate cultures and key value drivers result
  in value destruction.
• Examples
• Gillette and Duracell
• Eli Lilly and PCS
• AOL and Time-Warner

3
Spin Offs

• Yesterdays mergers are often todays spin-offs.
  There is a certain faddishness or
  follow-the-leader mentality in organizational
  structure and deals. The 1960s saw a
  conglomerate merger wave, while the 90s saw an
  emphasis on corporate focus.

4
Internal vs. External Markets

• When two activities are within the same
  corporation, transactions between them are not
  dictated by a market. (The corporation is an
  anti-market.)
• Often the justification for spin-offs is to
  achieve the benefits of a market (for example the
  stock market as a motivational tool for
  management).

5
Anslinger, Klepper Subramaniam

• Three ways of Breaking Up
• Tracking Stocks
• Dividend to parent shareholders or
• IPO
• Equity Carve-Outs
• IPO in the subsidiary, Parent retains majority
  stake.
• Spin-Offs
• Entire Subsidiary divested as dividend to parent
  shareholders.

6
AKS 2.

• Gains from splitting up
• Increased Analyst Coverage
• New investor base
• Improved Incentives for subsidiary management
• Improved Corporate Governance / Strategic
  Flexibility.

7
Less Common Gains

• Tax Advantages (Real Estate ownership set out as
  a REIT).
• Protecting subset of assets from litigation.
• Expropriating wealth from lenders by
  disproportionate debt burdens (mitigated by
  covenants, e.g., puttable bonds).

8
AKS 3.

• Concerns
• Spin-off is blood in the water.
• Sub might be taken over
• Forced to separate entirely.
• Facts relatively stable structures.
• Recent episodestap into a market bubble.