2)Write Short Notes:a.Spin Off
The creation of an independent company through the sale or distribution of new shares of anexisting business/division of a parent company is called Spin-off. It is a kind of de-merger when an existing parent company transforms into two or more separately re-organizeddifferent entities. The parent company distributes all the shares it owns in a controlledsubsidiary to its own shareholders on a pro-rata basis. In this process, the parent companygains effect to making two of the one company. It may be in the form of subsidiary or aseparate company. There is no money transaction in spin-off. The transaction is treated asstock dividend and tax free exchange. Both companies exist and carry on business. It doesnot alter ownership proportion in any company. The newly created entity becomes anindependent company taking its own decision and developing its own policies andstrategies, which need not necessarily, be the same as those of the parent company. Spin-off is necessary for a company having brand equity or for a multi-product company whichenters into collaboration with a foreign company. Businesses wishing to 'streamline' their operations, often sell less productive or unrelated subsidiary businesses as spin-offs. Thespun-off companies are expected to be worth more as independent entities than as parts of alarger business.
2)Write Short Notes:b.Divestitures
Divestiture is a transaction through which a firm sells a portion of its assets or a division toanother company. It involves selling some of the assets or division for cash or securities to athird party which is an outsider. These assets may be in the form of plant, division, productline or a subsidiary. The divestiture process is a form of contraction for the sellingcompany and means of expansion for the purchasing company. For a business, divestiture isthe removal of assets from the books. Businesses divest by the selling of ownership stakes,the closure of subsidiaries or by the bankruptcy of divisions. The buyers benefit due to lowacquisition cost of a completely established product line which is easy to combine in hisexisting business and increase his profit and market share. The seller can concentrate after divestiture more on profitable segments and consolidate its business activities. The motivefor divestiture is to generate cash for the expansion of other product lines, to get rid of poorly performing operation, to streamline the corporate firm or to restructure thecompany’s business consistent with its strategic goals. Divestiture enables the selling firmto have more lean and focused operation. This in turn, helps the selling company to increaseits efficiency and profitability and also help to create more value for its shareholders.The general opinion is that divestiture is the outcome of incapability of the parent companyto manage dissimilar assets or assets creating negative synergy. Some of the reasons for divestitures are mentioned here below:
Corporate attempt to adjust changing economic and political environment of thecountry.
Strategy to enable others to exploit opportunity effectively to optimize return.
To correct the previous investment decision where the company moved into theoperational field having no expertise or experience to run on profitable basis.
To help finance the acquisition.