1. Corporate Restructuring11
Chapter
Corporate Restructuring
and Divestitures

2. Corporate Restructuring Strategies
With constantly changing competitive environments, firms must consistently adjust
Managers have many options to change firm structure without taking part in a merger or acquisition
Corporate restructuring should occur within the framework of the firm’s overall strategy
No one-size-fits-all approach to corporate decision making

3. Types of Restructuring
Key methods of reorganizing assets and ownership
Type
Definition
Example
Asset sales
Sale of division or other assets to another firm, usually for cash
Quaker sold Snapple to Triarc (1997)
Equity carve-out
Public offering of partial interest in subsidiary creating new firm with at least some autonomy
Pharmacia carved-out 14% of Monsanto (2000)
Spinoff
Pro rata distribution of subsidiary shares creating new independent firm
Sears spun off Dean Witter Discover (1993)

4. Types of Restructuring
Variations of restructuring and divestiture
Type
Definition
Example
Split-up
Separation of firm into 2+ parts, often via spinoff
HP dividing into HP and Agilent (1999)
Tracking stock
Creation of new class of stock with value based on cash flows of a division
AT&T offering of AT&T Wireless (2000)
Exchange offer
Distribution giving shareholders choice between parent and subsidiary stock; creates separate public firm
Limited’s divestiture of Abercombie &Fitch (1998)

5. Types of Restructuring
Methods are sometimes used in tandem or employed sequentially
Equity carve-outs can be first stage of a broader divestiture, preceding:
Sale of remaining interest of subsidiary to another firm
Spinoff of remaining ownership to shareholders
Split-ups employ a variety of methods, usually spinoffs
Tracking stock may be first step of a spinoff or exchange offer

6. Restructuring Example:
AT&T has used almost every restructuring method in last 20 years
1984 antitrust break up: split-up using spinoffs
Shareholders receive 1 share of each “Baby Bell” for ever 10 AT&T shares
AT&T Capital
1993 $107.5 million public offering of 14%
1996 $2.2 billion asset sale to an investor group
Spinoff

7. Restructuring Example:
Split-up
Lucent: $3 billion carve-out in 18% IPO, followed by spinoff (.324 shares Lucent for each AT&T)
NCR: spinoff ( NCR shares per AT&T)
Universal Card: asset sale for $3.5 billion to Citicorp
Carve-out,
Spinoff
Spinoff
Asset sale
Universal Card

8. Restructuring Example:
AT&T Wireless
Tracking stock representing 15.6% interest was sold in IPO for $10.6 billion
Later, exchange offer gave shareholders choice of AT&T or AT&T Wireless stock
Last, spinoff executed in which .32 wireless shares were distributed to AT&T holders
AT&T Broadband
10/00 – AT&T announces it will divest unit
7/01 – Comcast makes unsolicited bid, forcing AT&T into an auction
12/01 – Comcast declared auction winner

9. More Restructuring Examples
Auto Parts Industry
GM divested Delphi Automotive Systems (1999) – 17.3% equity carve-out offered in IPO, followed by a spinoff
Ford spun off Visteon via a stock dividend
Phillip Morris
Restructuring to reinforce strategy of focus on food and tobacco
Equity carve-out of 16% of Kraft ($8.7 billion) helped pay down debt from Nabisco acquisition
Asset sale of Miller Brewing to South African Breweries for $5.6 billion

10. Restructuring Motives
Many possible motives for a firm to restructure
Direct relation between corporate strategy and corporate restructuring
Corporate focus often cited as restructuring reason, but focused companies also must review strategic alternatives in due to market changes
Divestiture reasons: learning, reversing mistakes, changing strategies (Weston, 1989)
Firms restructure to remain competitive and to respond to change forces in the economy

11. Divestitures and Wealth Creation
Modigliani, Miller, and Irrelevance
If no transaction or information costs, corporate organization is irrelevant
Managers cannot improve value by chopping firm into pieces
Theory frames analysis of information and transactions costs and other factors

12. Divestitures and Wealth Creation
Theory
Research Paper
Year
Concept of Restructuring
Incentives, Monitoring Costs
Alchian & Demsetz;
Jensen & Meckling
1972;
1976
Improves monitoring function of corp. governance
Information, Signaling
Myers & Majluf; Nanda
1984;
1991
May signal information known only to managers
Transaction Costs
Coase; Williamson; Klein et al
1937;
1975;
1978
Response to changes in transaction costs

13. Restructuring and Transaction Costs: Petrochemical Industry
Study of transaction cost uncertainty on vertical integration (Fan, 1996, 2000)
Impact of uncertain oil prices:
Before 1973 OPEC oil embargo, 13% of sample firms owned oil and gas assets
After embargo, fraction increased to over 50%
By 1992, fraction reverted back to 26%
Consolidation due to energy contracts being difficult to write and to enforce (higher transaction costs)
Example: Dupont (chemicals) bought Conoco (oil) in 1981; divested in carve-out and exchange offer in

14. Restructuring and Change Forces: The Natural Gas Industry
Change forces transformed industry over course of 100 years
Early 1900s – production close to consumers
1920s – gas discoveries in southwest required construction of pipelines – vertical integration between production and transmission
1930s – price regulation, and legislation requiring separation of production and transmission– caused decline in vertical integration
Current landscape – changing regulation has encouraged mergers and divestitures