1. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1 - - - - - - - - Chapter 11 - - - - - - - - Restructuring and Divestitures

2. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2 Corporate Restructuring Strategies General framework of corporate restructuring –Asset management Acquisitions Sell-offs or divestitures –Ownership relationships Spin-offs Split-up Equity carve-outs

3. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3 –Reorganizing financial claims Exchange offers Dual-class recapitalizations Leveraged recapitalizations Financial reorganization (bankruptcy) Liquidation –Other strategies Joint ventures ESOPs and MLPs Going-private transactions International markets Share repurchase programs

4. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4 Some basic forces –Need to meet global competition –Align interests between managers and shareholders — agency problem –Move assets to owners who can utilize them more efficiently –Reverse conglomerate merger movement of the 1960s

5. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5 Definitions –Divestiture Sale of segment of a company to a third party Sale for cash or securities or some combination thereof Assets revalued for purpose of future depreciation by the buyer

6. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6 –Spin-off Company distributes on a pro rata basis all shares it owns in a subsidiary to its own shareholders Two separate public corporations with initially same proportional equity ownership now exist No money changes hands Subsidiary's assets are not revalued Transaction treated as a stock dividend Transaction is a tax-free exchange

7. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7 –Equity carve-outs Some of subsidiary's shares are offered for sale to general public Bring infusion of cash to parent firm without loss of control Often sell up to 20% in IPO, later spin off of remainder of shares –Split-ups Two or more new companies come into being in place of original company Usually accomplished by spin-offs

8. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8 Diverse Motives for Divestitures Dismantling segments of conglomerates which had higher values as independent operations or better fit with other firms Sale of original business due to changing opportunities or circumstances

9. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9 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 Harvesting past successes to make resources available for developing other opportunities

10. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10 Discarding unwanted businesses from prior acquisitions to value-increasing buyer Divestiture to finance major acquisitions or LBOs Divestiture used as a takeover defense by selling off "crown jewel" Divestiture to obtain government approval of a combination of segments with competing products

11. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11 Corporate sale of divisions or business units to operating managements Divestiture of unrelated divisions to focus on core businesses Divestiture of low margin product lines to improve margins and profitability Divestiture to finance another firm Divestiture to reverse prior mistakes Divestiture of businesses after learning more about them

12. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12 Event Returns Buyers –Returns are not statistically significant Sellers –Average positive gains of 1 to 2% –Positive gains related to size of sell-off –Positive gains if proceeds paid out to shareholders

13. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13 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

14. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14 –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 Deflated by S&P 500 –Average price of divested units is 90% of purchase price –Sale price averages 143% of target's pretakeover market value Acquisitions that ultimately prove unsuccessful are considered poor investments by the market when they are made — unfavorable event returns

15. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15 Rationale for Divestitures Boot (1992) –Divestitures are a commonly observed post-takeover initiative –Target firm's management did not divest earlier because divestitures would represent admissions of earlier unwise decisions

16. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16 Cho and Cohen (1997) –Well performing operating units may partially hide poor performance of other units –When other units begin to underperform industry peers, sale of poorly performing units are triggered

17. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17 Berger and Ofek (1996) –Firms with largest diversification discount or value losses are likely to become takeover targets –Extent of post-takeover bustup sales activity is positively related to the size of diversification discount –Divested divisions in post-takeover bustups are generally purchased and become part of a focused, stand-alone firm

18. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18 Linn and Rozeff (1984) (LR) –Valid reasons 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 –Gains to divestitures (1-2%) smaller than for spin-offs (3-5%) May reflect poor performance prior to divestiture (LR rejected this rationale) May reflect that divestitures are smaller in scale May reflect managerial incentive factor

19. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19 John and Ofek (1995) –Value gains result from improved management of assets remaining after divestiture Attributed to increased focus Decrease in number of reported lines of business –75% of divested divisions are unrelated to core activities of seller –Supports hypothesis that better fit between buyer and divested divisions accounts for some of value gain