Module 4

Corporate divestitures have become increasingly common as companies seek to increase shareholder value through partial or total divestiture of operating units.  In general, these divestitures are motivated by the notion that consolidated financial statements often obscure the performance of individual business units, thus complicating their evaluation by market analysts.

The simplest form of divestiture is the outright sale of the business, a sell-off.  In this case, the company sells its equity interest to an unrelated party.  When a company sells the stock that it owns, it accounts for this sale in the same manner as the sale of any other asset: The excess of the cash received over the carrying amount of the investment is recorded as a gain or loss on the sale.

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The second form of divestiture is known as a spin-off. In this case, the company is distributing the subsidiary shares that it owns as a dividend to its shareholders who will, then, own shares in the subsidiary directly rather than through the parent company. In recording this dividend, retained earnings are reduced by the book value of the equity method investment and the investment account is removed from the balance sheet.

The initial sale of common stock by a corporation of one of its business units. The initial public offering generally involves less than the entire amount of the stock in the unit so the parent company retains an equity stake in the subsidiary. An equity carve-out is sometimes followed by a distribution of the remaining shares to the parent's stockholders. Also called carve-out, split-off IPO.

Information  Managerial Efficiency  Tax and Regulatory Factors  Bondholders Interest  Changing Economic Environment  Enable More Focused Mergers

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