Spin offs, carve outs and tracking stock

1
Spin offs, carve outs and tracking stock

• Corporate Restructuring

2
Motivations for transactions

• Market for corporate control
• Asset are more valuable to alternative management
  team
• Spin off, carve out, tracking stock
• Unlocking hidden value
• Stock market problem or management problem?
• Improving management incentives
• Spin off, carve out, tracking stock
• Agency costs
• Spin off, carve out, tracking stock

3
Spin offs

• Typically parent corporation distributes on pro
  rata basis, all the shares it owns in subsidiary
  to its own shareholders.
• No cash generally changes hands
• Non taxable event
• as long as it jumps through substantial hoops

4
Spin offs
Company A without Subsidiary B
Company before spin off
Subsidiary B
Shareholders
Shareholders own shares of combined company. Own
the equity in subsidiary implicitly.
5
Spin offs (2)
Company A after spinoff
Company after spin off
New company B
Shareholders receive Shares of company B
Shareholders
Old shareholders still own shares of company A,
which now only represent ownership of A without B.
6
Spin offs in 1990s

• 1991-mid 1996, 100 bn in tax-free spin offs
• Probably another 100 bn since
• Huge ones
• ATT/Lucent Technologies/NCR (97)
• GM/EDS
• Most much smaller
• Internet subsidiaries of bricks and mortar
  parents

7
Some recent spin offs

• Pepsi/Tricon
• Pepsi originally wanted to establish a captive
  channel for fountain beverage business, but found
  they needed to alleviate competitive barriers to
  expanding that business (many more restaurant
  chains)
• Whitman Corporation/Hussman/Midas
• Conglomerate discount, conflicts among management
  of divisions
• No synergies between bottlers/heavy industry/auto
  service
• RJR/Nabisco Holdings
• Tobacco litigation, discounting food company
• Carl Icahn, Bennet Lebow

8
Equity carve outs

• Also called partial IPO
• Parent company sells a percentage of the equity
  of a subsidiary to the public stock market
• Receives cash for the percentage sold
• Can sell any percentage, often just less than
  20, just less than 50, are chosen.

9
Equity carve out (partial IPO)
Company before carve out
Company A without subsidieary B
Subsidiary B
Stock market
Shareholders
Shareholders implicitly own 100 of equity of
subsidiary B through their Company A shares.
10
Equity carve out (partial IPO)
Company after carve out
Company A without subsidieary B
Portion of Sub B equity Not sold
X of sub B equity sold To market for cash In IPO
X of Company B shares
Shareholders
Stock market
Shareholders now own 100 of Company A (without
B) And (1-X) of Company B implicitly Through
their company A shares
11
Carve outs

• Why sell a partial stake?
• Pure play
• Get the stock market to understand business
• Once unit is revalued, the parent will be
  revalued as well (still owns the rest)
• Setting up a sale later

12
Other motives for carve outs

• Divisional managers incentives
• Kraft/Phillip Morris
• Thermo Electron
• Sell hot properties
• Gold subs in mid 80s
• Japanese subs in late 80s
• Internet subs in 97-99
• Why not sell all of it?

13
Targeted stock

• Special class of common stock designed to provide
  equity return linked to operating performance of
  a distinct business unit (targeted business)
• Splits companys operations into two (or more)
  publicly traded equity claims, but allows
  businesses to remain as wholly owned segments of
  parent organization.

14
Target stock vs. spin off

• Spin off creates equity of subsidiary, but
• subsidiary is no longer owned by, or controlled
  by the management of parent company
• new spun off stock has no equity claim on the
  assets or cash flows of the old parent company

15
Target stock vs. carve out

• Like a carve out, payoff on target stock is a
  function of the performance of the target
  business
• Like a carve out, parent company mgmt usually
  maintains control over business, but control is
  100 w/ target stock
• Unlike carve out, the target shares are not
  subsidiary shares

16
Target stock is not stock of the targeted business

• Target stock is stock of the consolidated
  company, not the targeted business (sub)
• Does not represent legal ownership interest in
  the assets of the sub
• Receives dividend rights against computed
  earnings of sub
• Voting rights (in decisions of corp) float as
  function of market value of the equity of sub

17
Distribution of target shares

• Pro rata stock dividend paid to existing holders
• Sell target shares to new public investors, with
  remainder held by parent
• proceeds retained by sub
• proceeds allocated elsewhere in company
• Shares issued in acquisition of target company

18
(No Transcript)
19
(No Transcript)