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Corporate Restructuring

Shrink to Grow

CONTENTS
Executive Summary

1.

Understanding Corporate Restructuring in Japan


1.1 Regulatory Reforms
1.2 Trends in M&A Transactions in Japan
1.3 The Corporate Restructuring Survey
1.4 Summary

2
2
4
7
10

2.

Creating Value through Divestitures


2.1 The Pattern of a Typical Corporate Restructuring Process
2.2 Alternative Divestiture Structures
2.3 Spin-Ins
2.4 Corporate Splits
2.5 Sell-Offs
2.6 Equity Carve-Outs
2.7 Spin-Offs
2.8 Tracking Stocks
2.9 Joint Ventures
2.10 Summary

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11
13
14
16
19
20
21
23
24
26

3.

Achieving Value-Building Growth


3.1 Common Obstacles to Restructuring
3.2 Future of Corporate Restructuring
3.3 Key Factors for Successful Restructuring
3.4 Managing Balanced Business Portfolios
3.5 Pruning the Portfolios through Proactive Divestitures
3.6 Summary

27
27
28
29
30
31
34

Glossary

35

List of CASE STUDIES


Case Study 1:

Nissan's Dramatic Turnaround

12

Case Study 2:

Matsushita's Spin-Ins to Implement Groupwide Restructuring

14

Case Study 3:

Thermo Electron's "De-Conglomerating" through Spin-Ins

15

Case Study 4:

NEC's Restructuring through Corporate Splits

17

Case Study 5:

Sumitomo Rubber's Splitting of its Non-Tires Businesses

17

Case Study 6:

Osaka Gas's Corporate Splits followed by Sell-Offs

18

Case Study 7:

Japan Telecom's Use of a Holding Company as a Restructuring Vehicle

18

Case Study 8:

Chugai's Reactive Spin-Off to Avoid Anti-Trust Issues

22

Case Study 9:

Sony's Issuing of the First Tracking Stock

24

Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth

25

Case Study 11: Takeda's Sell-Offs of Non-Core Businesses through Joint Ventures

25

Case Study 12: Hitachi's Difficulty in Finding Buyers

32

Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi

33

ABeam Research & Linklaters

Corporate Restructuring

Executive Summary
Since 1997, there has been a series of legislative and tax changes

(as they are in the U.S. and Europe) if the tax disadvantages were

in Japan with the aim of facilitating corporate restructuring. In

removed. Some of the most successful corporate restructurings

particular, the introduction of procedures such as share exchanges,

have been where parent companies have prepared exit strategies

share transfers and corporate splits has provided companies with

at the start of the corporate restructuring process and have used

greater flexibility in pursuing corporate restructuring. Although

interim solutions as a means to develop stronger subsidiaries

corporate restructuring is not facilitated by legislative and tax

before a full exit at a later date. See Chapter 2.

changes alone, the increased level of M&A activities over the

We conducted a survey to determine the current and future

same period is evidence that the recent reforms have, to some

trends in restructuring activities. Our findings revealed that many

extent, achieved their aims. See Chapter 1.

companies rated planning growth strategies prior to restructuring

A typical corporate restructuring process comprises three phases.

as very important, but assessed their own performance as less

Faced with debt and cash flow problems, companies should

satisfactory. To achieve value-building growth, companies must

execute financial restructuring immediately to stabilize their

develop and maintain balanced business portfolios. The key

financial situation. Once the situation is stabilized, companies

challenge is to nurture growth options while proactively divesting

need to start business rebuilding to strengthen their core

underperforming or non-core businesses. Success in proactive

businesses. Finally, companies can shift their focus to long-term

divestitures is likely when companies deliberately use interim

value-building growth. Across the three phases of the restructuring

solutions before an eventual exit and lay the groundwork for

process, divestitures play an increasingly crucial role in Japan.

creating a stand-alone entity. See Chapter 3.

Divestitures may take several different forms: corporate splits,

We include in this report a number of case studies. One of the

sell-offs, equity carve-outs, spin-offs, tracking stocks and joint

lessons that these demonstrate is:

ventures.

The more extensive the restructuring, the greater

Corporate splits, minority carve-outs and joint ventures are often

the growth prospects; the stronger the growth, the

used as interim solutions toward an eventual exit. In Japan the

greater the need for restructuring. Shrink to grow

most common exit alternatives are sell-offs and full or majority

and vice versa.

carve-outs. We believe spin-offs would also be popular in Japan

ABeam Research & Linklaters

Corporate Restructuring

1. Understanding Corporate Restructuring in Japan


This first chapter presents an overview of the recent regulatory

of this survey illustrate the recent trends in M&A transactions

reforms in Japan related to corporate restructuring and recent

in Japan and give an insight into how Japanese companies are

trends in M&A transactions in Japan.

conducting (or intending to conduct) corporate restructurings in


the future, in particular how Japanese companies are starting to

This chapter also sets out certain results of our survey on corporate

make use of alternative methods to conduct such restructurings (see

restructuring which we conducted in March 2003. The results

1.1

Chapter 3).

Regulatory Reforms

1.1.1 Overview
Over the past several years, many of the obstacles to corporate

In April 2001, the Code was amended to introduce the corpo-

restructuring contained in the Commercial Code of Japan (the

rate split procedure.

"Code") have been amended or removed, beginning in 1997 with

In April 2001, the corporate reorganization rules were intro-

the introduction of simplified mergers. This was followed by the

duced under the 2001 tax reform.

introduction of equity redeployment procedures such as share

In October 2001, the treasury stock system was introduced.

exchanges (Kabushiki Koukan), share transfers (Kabushiki Iten)

This system allows companies to buy back their shares and

and corporate splits (Kaisha Bunkatsu). Consequently, examples

hold them for unspecified purposes, including later use in

of corporate restructuring, including divestitures, have become

M&A transactions through share exchanges.

more commonplace in Japan.

In August 2002, the consolidated taxation system was enacted.


In April 2003, the Industrial Revitalization Law was revised

The Japanese tax rules have also been amended to provide

to facilitate corporate restructuring. Under this law, companies

incentives to companies to take advantage of the new restructuring

whose restructuring plans receive approval from the relevant

measures. The corporate reorganization tax reforms have been

authorities are eligible for tax incentives and governmental

effective since April 1, 2001 and allow for tax-free restructuring

financial assistance. They may also take advantage of a less

under certain circumstances.

restrictive corporate law regime.

The following presents a brief list of recent changes to the Code

As part of the revision of the Industrial Revitalization Law, there

and other legislation and the taxation rules that are relevant to

are measures designed to encourage inward investment by non-

corporate restructuring in Japan.

Japanese companies. For example, in a statutory merger, the

In October 1997, the Code was amended to simplify and ratio-

revisions to the law allow shares in a third company to be issued to

nalize merger procedures.

the shareholders of the extinguishing company (whereas normally

In December 1997, the Anti-Monopoly Law was amended to

they could only receive shares in the surviving company). What

allow pure holding companies to be established in Japan.

is more, the third company issuing shares can be a non-Japanese

In October 1999, the Code was amended to introduce the share

company, which makes this new law a potentially significant

exchange and share transfer procedures.

additional tool to facilitate inward investment and corporate

In April 2000, the Composition Law was abolished and the

restructuring in Japan.

Civil Rehabilitation Law was introduced to facilitate corporate workouts.

ABeam Research & Linklaters

Corporate Restructuring

1.1.2 Share Exchanges


The share exchange procedure, which was introduced in October

Figure 1.1 Share Exchanges

1999, allows companies to make other companies both within the

Shareholder Shareholder

New shares

group and outside the group wholly-owned subsidiaries (Figure


1.1). X Co. acquires all of Y Co.'s outstanding shares in exchange

Y Co. shares

X Co.

for new shares issued by X Co. at a predetermined exchange

Y Co.

X Co.

Y Co.

X Co.
100%

Share
exchange
agreements

ratio. As a result of the completion of the share exchange, Y Co.


becomes a wholly-owned subsidiary of X Co. and shareholders of

Y Co.

Source:ABeam Research

Y Co. become shareholders of X Co.

1.1.3 Share Transfers


The share transfer procedure, which was introduced along with

Figure 1.2 Share Transfers

the share exchange procedure in October 1999, allows companies

Shareholder

to create a new holding company (Figure 1.2). X Co. incorporates

New shares

a new company. New Co. acquires the entire shares of X Co. in

X Co.
shares

exchange for new shares issued by New Co. Subsequently, X Co.

X Co.

New Co.
New Co.

becomes a wholly-owned subsidiary of New Co. and shareholders

100%
X Co.

X Co.

of X Co. become shareholders of New Co.

Source:ABeam Research

1.1.4 Corporate Splits


The corporate split procedure was introduced in April 2001.

For tax purposes, corporate splits are further classified according

Under the Code, corporate splits are classified into two types:

to whether the new shares as consideration are distributed to the

(i) where a business is transferred into a new company; and (ii)

transferor company or directly to the shareholders of the transferor

where a business is transferred to an existing company, in each

company. Accordingly, there are the following types of corporate

case, in exchange for shares in the transferee company. It is also

splits (Figure 1.3).

possible to transfer a business to a newly established joint venture


company in exchange for shares in the JV company.
Figure 1.3 Types of Corporate Splits

Allotting new shares to


the shareholders

Allotting new shares to


a transferor company

Transferring a business to
a new company

X Co.
A

New
shares

X Co.
B

New Co.

X Co.

X Co.
A

Y Co.

New
shares

X Co.

Y Co.
B

X Co.

Y Co.

B2 C

B1

New
shares

X Co.

New Co.

X Co.
A

Y Co.

X Co.

Source:ABeam Research

New
shares

Y Co.

C
New Co.

B1 B2

New shares

Shareholder

X Co.

Transferring a business to
a newly created joint venture company

Shareholder

Transferring a business to
an existing company

New shares

Y Co.

X Co.

Y Co.

X Co.

New Co.

Y Co.

B2 C

B1 B2

B1

ABeam Research & Linklaters

1.2

Corporate Restructuring

Trends in M&A Transactions in Japan

1.2.1 General Trends


In the following pages, we describe the trends in M&A

Figure 1.4 Number of Japanese Company Related


M&A Transactions

transactions up to the end of 2002. The total number of Japanese

Number of Transactions
2,000

company related M&A transactions announced in 2002 increased


companies ("In-In deals") constituted 84% of all deals in 2002. It

Note: In-In M&As mean M&As between Japanese companies.


1,881
In-Out M&As mean M&As of non-Japanese companies by Japanese companies.
Out-In M&As mean M&As of Japanese companies by non-Japanese companies.
1,600
1,442
1,344

is interesting to note the significant increase in the number of In-In

1,200

to 2,244. The number of M&A transactions between Japanese

deals in the five-year period from 19972002 (Figure 1.4).

Increased number
of In-In M&As

800

In this paper, we have only included data for the number of M&A

525

454

400

transactions completed; complete data showing the value of these


transactions is not available. Data was available for 931 out of

93

2,244 M&A transactions announced in 2002 (i.e., 41% of all

382

354

394

94

95

96

In-In

968
636

In-Out
Out-In

97

98

99

00

01

02

Year

Source:Nomura Securities

M&A transactions). The value of these 931 cases was 3.42 trillion
yen. While the value of In-In deals remained roughly flat for the

Figure 1.5 Total Value of Japanese Company Related M&As

period from 2000 to 2002, the value of M&A transactions of non-

bn
3,500

Japanese companies by Japanese companies ("In-Out deals")


and M&A transactions of Japanese companies by non-Japanese

3,000

companies ("Out-In deals") fell dramatically during the same

2,500

period (Figure 1.5). This data suggests the following trends:

2,000

there are fewer high profile (i.e., big value) transactions now

1,500

than two or three years ago; and

Note : The total value of transactions is based only on cases for which data is available.
Data availability differs widely depending on transaction types.
In-Out

While the value of In-In


deals remain flat, the value
of both In-Out and Out-In
deals collapsed

1,000

Japanese rather than foreign companies are driving an increase

500

in M&A transactions but such Japanese companies are pre-

dominantly active in Japan rather than abroad.

In-In

Out-In

93

94

95

96

97

98

99

00

01

02

Year

Source:Nomura Securities

M&A transactions can be categorized into four types:


Figure 1.6 Number of In-In M&A Transactions by Type

(1) mergers;
(2) equity acquisitions (controlling over 50% of the voting

Equity
participations

shares in a company);

Asset
acquisitions

(3) asset acquisitions (whether an entire business or a collection


of assets); and

21%

14%
8%

62%

16%
Equity
acquisitions

(4) equity participations (controlling up to 50% of the voting

21%

Mergers

26%

32%

shares in a company).
Mergers constituted the majority of In-In deals in the 1990s. While

Number of Transactions
800

the number of equity acquisitions, asset acquisitions and equity

700

participations increased during the 2000 to 2002 period, the number

600

of mergers remained flat during the same period and consequently

500

accounted for only 21% of In-In deals in 2002 (Figure 1.6).

400
300

Significantly, asset acquisitions rose by 70% in 2002 over 2001.

200

This sharp rise in asset acquisitions reflected the increasing

100

number of business divestitures and sell-offs of assets as part of

corporate restructuring.

Increased diversity in
M&A transaction type

489
395
389

Mergers

281

Asset
acquisitions
Equity
participations

74
62
37

93

94

95

Source:Nomura Securities

Equity
acquisitions
608

96

97

98

99

00

01

02

Year

ABeam Research & Linklaters

M&A transactions are often categorized as either inter-group

Corporate Restructuring

Figure 1.7 Number of Inter- and Intra-group M&A Transactions

or intra-group. An inter-group M&A transaction is when

Number of Transactions

1,200

companies from two different groups are involved. An intra-group

1,073
Inter-group M&As

1,000

M&A transaction is when all of the companies involved in the


transaction belong to the same group.

800

Inter-group and intra-group M&A transactions increased in

600
400

parallel from 1995 to 1999. Thereafter, the number of intergroup M&A transactions surpassed that of intra-group M&A

200

transactions, reflecting the increased level of restructuring in

Increased number
of inter-group M&As

825
750
808
500

279
199

179

213

175

183

175

181

93

94

95

96

277

468

320

617

594

Intra-group M&As

316
248

97

98

99

00

01

02

Year

Japan generally (Figure 1.7).


Source:Nomura Securities

The mix of inter-group M&A transactions underwent significant

Figure 1.8 Number of Inter-group M&A Transactions by Type

changes during the 20002002 period. Equity participations

Number of Transactions

tripled in number to 377 in 2002. Asset acquisitions showed a

400

2.5-fold increase (Figure 1.8).

350
300

Although mergers are still the most popular form of transaction

250

in intra-group M&A transactions, asset acquisitions and equity

200

acquisitions have grown in popularity in recent years (Figure 1.9).

150

The growth in asset acquisitions has been fueled by the increase

100

in the number of business transfers as part of reorganizations and

50
0

consolidations within groups.

377
Equity
participation

Inter-group mergers have


leveled out but other
inter-group M&A
transactions have
increased significantly

367
294

Asset
acquisitions
Equity
acquisitions

Mergers

93

94

95

96

97

98

99

35

00

01

02

Year

Source:Nomura Securities

The number of equity acquisitions has risen as the review of


capital policy became prominent in business trends. Major

Figure 1.9 Number of Intra-group M&A Transactions by Type

companies are increasingly turning majority-owned subsidiaries

Number of Transactions

400

into wholly-owned subsidiaries. Such transactions are sometimes

350

referred to as spin-ins. According to the Tokyo Stock Exchange,

300

48 publicly listed companies were spun in by their parent

250

companies and consequently were delisted in 2002, up from 30 in

200

the previous year.

150

354

Intra-group acquisitions of
assets and equity have
increased significantly

Mergers
241

Asset
acquisitions
Equity
acquisitions

100

Equity
participations

50
0

18

93

94

95

Source:Nomura Securities

195

96

97

98

99

00

01

02

Year

ABeam Research & Linklaters

Corporate Restructuring

1.2.2 Use of New Procedures for Equity Redeployment


The introduction of equity redeployment procedures such as share

Figure 1.10 Number of Share Exchanges/Share


Transfers and Corporate Splits

exchanges and share transfers (in October 1999) and corporate

Number of Transactions

splits (in April 2001) gave companies greater flexibility with

100

Note: Share exchanges include both intra- and inter-group share exchanges.

regard to corporate restructuring.

Growing use of
the share exchange
procedure within
the group

80

The number of M&A transactions using share exchanges


increased 59% from 51 in 2001 to 81 in 2002. Among these,

60

75% were effected to make majority-owned subsidiaries into

81

61
51

wholly-owned subsidiaries. The number of share transfers to


40

2001 and the number of corporate splits increased to 26 in 2002


20

from 23 in 2001 (Figure 1.10).

23

20
15

between parents and subsidiaries. If such deals are included, the

Corporate
splits
26

34

32

12

These figures for corporate splits, however, do not include deals

Intra-group
share
exchanges
Share
transfers

45

create holding companies decreased to 9 in 2002 from 15 in

Share
exchanges

99

01

00

02

Year

Source:Nomura Securities

number of corporate splits increased to 224 in 2002, an increase of


nearly 50% on 2001 (Figure 1.11).

Figure 1.11 Number of Corporate Splits by Objective


Number of Transactions

250

Growing use of
the corporate split
procedure

200

224

2002
2001
151

150

100

92

84

68
50

46
29

33
8

M&A

Source:Recof

15

Intra-group Split of business Reorganization Total


M&A
unit into a wholly- into a holding
company
owned subsidiary

ABeam Research & Linklaters

1.3

Corporate Restructuring

The Corporate Restructuring Survey

We conducted a survey on corporate restructuring in March 2003

Figure 1.12 Profile of the Survey Respondents

to determine:

Number of Employees

current and expected levels of restructuring activities in Japan;

Type of Industry
Transportation &
Services

Less than 3,000


4.3%
3,000~
5,000
8.5%

motives for engaging in restructuring activities;


restructuring methods that are used today and will be used in
the future; and

70.2%

10.6%

5,000~10,000

10,000 and
over

Questionnaires were sent to executives of 250 listed companies

6.4%
Financial
6.4%
Services 6.4%

27.7%

59.6%

key factors for successful corporate restructuring.

Utility & Others

Construction &
Manufacturing

Wholesaling
& Retailing

with more than 1,000 employees on a consolidated basis. A total


Source:ABeam Research

of 47 companies responded to the survey. 60% of our respondent


companies have 10,000 or more employees and 70% are

Figure 1.13 Organizational Structure

manufacturers (Figure 1.12).

Other system
Holding
4.3%
company
system
8.5%

1.3.1 Organizational Structures


55% of our respondents adopt a divisional unit system. 32%

55.3%

have gone one step further, creating quasi-companies within

31.9%
In-house
company
system

themselves (Figure 1.13). This divisional company or in-house


company system is designed to increase management efficiency
through swift decision-making and clearly defined responsibility

Divisional
unit system

Source:ABeam Research

and authority. 9% of our respondents have established holding


companies.

Figure 1.14 Performance Metrics


0%

1.3.2 Increased Focus on Shareholder Value

20%

40%

60%

Sales and
profits

The results of our survey indicate that Japanese companies are

76.6%

Cash flows and


return on assets

beginning to focus more on shareholder value. Though 77% of


our respondents use sales and profits as key metrics, 21% use such

Value metrics
(e.g, EVA)

performance metrics as economic value added (EVA) to measure

Balanced
Score Card

shareholder value creation (Figure 1.14).

Source:ABeam Research

80%

44.7%
21.3%
10.6%

100%

ABeam Research & Linklaters

Corporate Restructuring

1.3.3 Current Corporate Restructuring Activities and Motives


60% of our respondents are currently pursuing corporate

Figure 1.15 Present Situation in Corporate Restructuring

restructuring through intra-group and inter-group M&A

No M&As
2.1%

transactions simultaneously. More than 72% are conducting

Wrapping up
M&As
10.6%

inter-group M&A transactions (Figure 1.15). These statistics


are consistent with the increased level of inter-group M&A

Focusing on
intra-group M&As
14.9%
12.8%

transactions over the past three years (Figure 1.7).

59.6%

Focusing on
inter-group M&As

Conducting intra-group
and
inter-group M&As
simultaneously

The results of our survey revealed that strengthening core


businesses, increasing shareholder value and achieving growth are
the three main motives for corporate restructuring (Figure 1.16).

Source:ABeam Research

We asked respondents to assess the degree to which they had


achieved their objectives on a scale of one to five. 28% of

Figure 1.16 Motives for Corporate Restructuring

our respondents say it is too early to assess the results of their

0%

restructuring efforts. No respondents say that their objectives have

10%

20%

30%

40%

50%

Strengthening
core businesses

been fully achieved. 55% say that their objectives were nearly or

55.3%

Increasing
shareholder
value

moderately achieved (Figure 1.17).

60%

42.6%

Achieving
growth

40.4%

Improving
financial position

31.9%

Pursuing group
synergy

27.7%

Eliminating
duplication of
businesses
Divestiture of less
profitable
businesses
Divestiture of
non-core
businesses

23.4%
21.3%
21.3%

Unlocking
intrinsic value

4.3%

Source:ABeam Research

Figure 1.17 Degree of Attainment of Objectives


Fully achieved

No answer
2.1% 0.0%

27.7%
Unable to assess

Unachieved

4.3%

10.6%
Partially achieved

Source:ABeam Research

21.3%
Nearly achieved

34.0%
Moderately achieved

ABeam Research & Linklaters

Corporate Restructuring

1.3.4 Restructuring Methods


There is a wide range of options available for companies to

Many companies executed restructurings using the new

implement restructuring. The results of our survey indicate that

methods available to companies, including share exchanges and

91% of our respondents have closed unprofitable businesses

corporate splits. 34% of our respondents have made majority-

over the past three years (Figure 1.18). Creation of joint ventures

owned subsidiaries into wholly-owned subsidiaries through

(81%) is the second most popular method. Other widely

share exchanges. 23% have reorganized their business units and

used methods for restructuring include: increasing the size of

subsidiaries by way of corporate splits. 21% have established

controlling stakes in subsidiaries (55%), selling off subsidiaries

new subsidiaries, again using the corporate split procedure.

to companies outside the group (55%), selling off businesses


to companies outside the group (45%), acquiring companies
outside the group for cash (43%) and acquiring businesses from
companies outside the group (40%).

Figure 1.18 Restructuring Methods Used Over the Past Three Years
0%

20%

40%

60%

80%

Closure of unprofitable businesses

91.5%

Creation of a JV with companies outside the group

80.9%

Increase in the size of controlling stakes in


subsidiaries

55.3%

Sale of subsidiaries to companies outside the group

55.3%

Sale of businesses to companies outside the group

44.7%

Cash acquisition of companies outside the group

42.6%

Purchase of businesses from companies outside


the group

40.4%

Dissolution of a JV with companies outside the group

36.2%

Spin-ins of subsidiaries through share exchange

34.0%

Reorganization of business units/subsidiaries through


corporate split procedure

23.4%

Split of business units into subsidiaries through


corporate split procedure
Carve-outs of subsidiaries as publicly traded
businesses

21.3%
14.9%

Merger with companies outside the group

12.8%

Sale of businesses/subsidiaries through MBO

10.6%

Creation of a holding company through share


exchange/share transfer procedures

6.4%

Sale of businesses/subsidiaries to buyout funds

6.4%

Acquisition of companies outside the group through


share exchange procedure

100%

2.1%

Source:ABeam Research

ABeam Research & Linklaters

1.4

Corporate Restructuring

Summary

Since 1997, there has been a series of legislative and tax changes

The results of our survey provide anecdotal evidence for the

in Japan with the aim of facilitating corporate restructuring. In

increased level of corporate restructuring and, more importantly,

particular, the introduction of procedures such as share exchanges,

suggest that a high proportion of large companies continue

share transfers and corporate splits has provided companies

to engage in restructuring activities with the objectives of

with greater flexibility in pursuing corporate restructuring. The

strengthening core businesses and increasing shareholder value,

number (and, to the extent data is available, value) of M&A

among others. Almost every large company has been engaged

transactions has increased over the same period. In particular, the

in some form of corporate restructuring. Most of them have

number of M&A transactions using new procedures has increased

closed unprofitable businesses and created joint ventures and

significantly. This seems to indicate that, at least on a superficial

approximately half of them have made divestitures and/or

level, the recent changes in legislation and taxation have achieved

acquisitions.

or begun to achieve their aims.

10

ABeam Research & Linklaters

Corporate Restructuring

2. Creating Value through Divestitures


Recent changes in the Code and taxation rules allow Japanese

engaged in divestitures of underperforming business units or

companies to use a wide range of restructuring options. Many

subsidiaries. In this chapter, we will describe the pattern of a

companies have executed restructurings using the new options

typical corporate restructuring process and examine in depth

available to companies. Large companies are coming under more

various alternative divestiture structures. This chapter will also

pressure to create shareholder value. We believe that this trend

explore many case studies, which demonstrate specific examples

will continue and that large companies will become increasingly

of how companies put various divestiture structures into practice.

2.1

The Pattern of a Typical Corporate Restructuring Process

The pattern (as illustrated in Figure 2.1 below) of a typical

Figure 2.1 Shrink to Grow

corporate restructuring process calls for a company to stabilize


its financial situation, return to profit and then focus on growth.

+
ROE < Ke
g>0

If companies incur excessive debts and suffer from deteriorating

ROE > Ke
g>0

cash flows, short-term measures will need to be taken immediately


Asset Growth (g)

to generate cash for debt payments and stabilize the financial


situation. To release cash (and thus reduce debts), companies can
sell off fixed assets or underperforming businesses and rationalize
working capital (e.g., accelerate debtor collections, extend creditor

Financial
Restructuring

ValueBuilding

Business
Rebuilding

Growth

payments or reduce inventories). The priority in this phase, called


ROE < Ke
g<0

financial restructuring, is to stabilize financial situations.


-

Once the financial restructuring phase is over, companies will


need to strengthen their core businesses so that they can generate

enough cash to finance subsequent growth initiatives. No growth

ROE: return on equity


Ke: cost of capital

initiatives can commence without having strong core businesses.

Source:ABeam Research

To improve profitability in core businesses, companies can


redesign and streamline business processes. Such efforts can be
extended to the entire supply chain. We refer to this phase as
business rebuilding.
When companies have improved the efficiency of their core
businesses sufficiently, they are poised to shift emphasis from
short-term profitability to long-term profitable growth. To sustain
growth, companies need to launch new products and develop
new markets. This phase is called value-building growth.
Growth initiatives usually take several years to yield results.
Consequently, companies will need to consider front-loading of
growth initiatives. In many cases, business rebuilding and valuebuilding growth take place simultaneously rather than one after
the other (see the Nissan case study 1 below).

11

ROE > Ke
g<0
0
Return (ROE Ke)

ABeam Research & Linklaters

Corporate Restructuring

Case Study 1: Nissan's Dramatic Turnaround


Nissan Motor faced serious problems in the early 1990s. Nissan, led

Figure 2.2 Nissan: Automotive Cash Flow

by Yoshifumi Tsuji, announced in 1993 a restructuring plan including

Billion yen

1,000 *
PPE: Property, plant and equipment

the closure of its major assembly plant. Although the plan aimed

15.6

to return to profitability by 1997, Nissan continued to suffer a loss.

94.8

900

134.6

38.2

Yoshikazu Hanawa, who succeeded Tsuji in 1996, announced a new

800

restructuring plan in 1998. However, Nissan was still saddled with


700

more than 2 trillion yen in debt and needed a capital injection to

215.2

600

The Renault-Nissan Alliance was formed in 1999 and Carlos Ghosn

500

31.0

Proceeds 40.4
from sales
of PPE* 98.7

308.7

was named Nissan's COO in that year. Ghosn's aggressive Nissan


400

Revival Plan (NRP) was announced in October 1999. Although he


had earned the nickname "le cost killer" in France, Ghosn understood

491.0

302.0

106.3

Others

accelerate its debt reduction.

39.8

108.9

Proceeds from
sales of
operations

Proceeds
from sales 169.7
of securities

80.2
287.4

395.1

797.3

629.2

300
Others

that Nissan would not achieve lasting profitable growth by cost


200

reductions alone. The NRP focused on building the foundations


for long-term growth whilst simultaneously undergoing systematic

Operating
cash flow 296.6

100

financial reform.

293.1
195.7

Capital
investment

The first phase of the NRP was financial restructuring. For two years
up to the end of March 2002, Nissan sold off fixed assets and non-

376.4

45.4

Cash
Cash
generated used

Cash
Cash
generated used

FY00

FY01

Cash
Cash
generated used

FY02

Source:Nissan

core businesses and raised cash worth 524 billion yen to pay down
interest-bearing debt (Figure 2.2). The second phase was business

The third phase of value-building growth was started with the launch

rebuilding. Nissan implemented the "3-3-3" initiative to reduce

of the three-year Nissan 180 plan in April 2002. Nissan 180 plan

purchasing costs by 20%. The "3-3-3" initiative means: 3 partners

means one million additional unit sales by the end of fiscal 2004

(suppliers, purchasing and engineering) working together in 3 regions

compared with fiscal 2001, 8% operating profit margin and zero net

over 3 years. Nissan achieved a 20% reduction in purchasing costs

automotive debt at the end of fiscal 2004. Nissan also continued the

by March 2002, one year ahead of schedule (Figure 2.3). Lower

"3-3-3" initiative to further reduce costs by 15% over three years.

purchasing costs increased operating cash flow to 629 billion yen for

The first year of Nissan 180 marked net sales of 6.85 trillion yen, up

the fiscal year 2001 and thus further reduced interest-bearing debt to

10.6% from the fiscal year 2001, and net income of 495 billion yen,

432 billion yen at the end of the fiscal year 2001 (Figure 2.4).

up 33.1% (Figure 2.5).

Figure 2.3 Nissan: Purchasing Cost Reduction

Figure 2.4 Nissan: Net Automotive Debt


Billion yen

100

2,500

Nissan beat its own


purchasing cost
reduction
targets
-8%

2,100

Plan

90

-751

2,000
1,500

-11%
-14.5%

Nissan eliminated its


automotive debt
1,349 -396
953

1,000

-521

Actual
-20%

80

-20%

FY00

FY01

500

432

-440

NRP Target
0

FY02

Source:Nissan

Source:Nissan

12

-8.6

3/99

3/00

3/01

3/02

3/03

ABeam Research & Linklaters

Corporate Restructuring

While the foundation is being laid in business rebuilding, Nissan

Figure 2.5 Nissan: Net Sales and Net Income

180 also focuses on growth. This demonstrates that the business

Billion yen
1,000

rebuilding phase and value-building growth phase may take place

Billion yen
7,000
6,659

800

simultaneously rather than one after the other.

600

Nissan's growth initiatives include launching new models and

6,500
6,196

6,198

6,090
6,039

5,801

200

fiscal year 2002, to be followed by 16 new models during fiscal years

6,580

Net sales

400

developing new markets. Nissan introduced 12 new models in the

6,829
6,565

5,977

5,834

331

495

372

6,000

78

2003 and 2004. In addition, Nissan and China's DongFeng Motor

established a new joint venture, which commenced operations in July

-200

2003. This paved the way for Nissan's first entry into the Chinese

-400

market. The new company aims to sell 550,000 units by 2006.

-600

-14

-56

-800

5,500

-87

-88
-166

-28

With NISSAN 180, Nissan


took a step toward valuebuilding growth

Net income

-684
3/93

3/94

3/95

3/96

3/97

3/98

3/99

3/00

3/01

3/02

NRP

3/03

5,000

4,500

4,000

180

Source:Nissan

2.2

Alternative Divestiture Structures

Whereas section 2.1 focused on the general principles of corporate

Electron case study 3 below). A joint venture can be used as a

restructurings, in this section we describe alternative divestiture

means of acquiring or exiting a business in two stages. In the first

structures, other than the closure of unprofitable businesses.

stage, a parent company and its partner company create a joint

Divestitures play a major role in corporate restructuring in the U.S.

venture company. In the second stage, the parent company sells its

and Europe. There are three basic ways to divest a subsidiary: sell-

remaining shares of the joint venture to the partner after a certain

off, equity carve-out and spin-off (Figure 2.6). Other methods

period of time (see the Takeda case study 11 below).

of divesting a subsidiary include corporate splits and tracking


stocks. Corporate splits are commonly used to effect intra-group
Figure 2.6 Options to Implement
Corporate Restructurings

corporate restructurings and to prepare a business for divestiture.


A tracking stock is a specialized option for a parent company

M&As

to realize hidden value in a business unit or subsidiary while

Mergers
Acquisitions

retaining control of the unit or subsidiary concerned.

Inter-Group Acquisitions
2.3 Spin-Ins

We also describe spin-ins and joint ventures. A spin-in is the

Divestitures

2.4 Corporate Splits

acquisition of minority shares in majority-owned subsidiaries.

2.5 Sell-Offs

Consequently, majority-owned subsidiaries become wholly-owned

2.6 Equity Carve-Outs


2.7 Spin-Offs

subsidiaries. In many cases spin-ins are executed with the aim of

2.8 Tracking Stocks

implementing groupwide restructuring and are followed by further

2.9 Joint Ventures

divestitures (see the Matsushita case study 2 and the Thermo

Source:ABeam Research

13

ABeam Research & Linklaters

2.3

Corporate Restructuring

Spin-Ins

Increasingly, companies are making majority-owned subsidiaries

groupwide restructuring by streamlining overlapping businesses and

into wholly-owned subsidiaries. Such transactions are referred

redeploying assets and capabilities within the group. Consequently,

to as spin-ins. Often spin-ins are implemented through the share

spin-ins will often lead to divestitures (see the Matsushita case

exchange procedure. Spin-ins allow a parent company to implement

study 2 and the Thermo Electron case study 3 below).

Case Study 2: Matsushita's Spin-Ins to Implement Groupwide Restructuring


As part of its restructuring program, in October 2002, Matsushita

between Kyushu Matsushita Electric and Matsushita Graphic

Electric Industrial (MEI) made five majority-owned subsidiaries

Communications Systems. MEI also split its environmental

into wholly-owned subsidiaries by way of the share exchange

systems sales unit into Matsushita Seiko and the company was

procedure described in section 1.1.2. The five group companies

renamed Matsushita Ecology Systems. Finally, by combining the

were Matsushita Communications Industrial, Kyushu Matsushita

FA Company, an in-house company of MEI, and the FA division

Electric, Matsushita Seiko, Matsushita Kotobuki Electronics

of Kyushu Matsushita Electric, Panasonic Factory Solutions was

Industries and Matsushita Graphic Communications Systems.

newly established. These transactions are examples of the use of

Four of these companies had been publicly listed companies and

the corporate split procedure described in section 1.1.4 (corporate

consequently were delisted (Figure 2.7).

splits are described in more detail in section 2.4).

Thereafter, MEI implemented its groupwide restructuring in

In line with the restructuring initiatives, MEI also made two

January 2003. MEI split its sales unit of mobile communication

other group companies, Matsushita Electronic Components and

equipments into Matsushita Communications Industrial and the

Matsushita Battery Industrial, into wholly-owned subsidiaries

company was renamed Panasonic Mobile Communications.

through share exchanges in April 2003.

Panasonic Communications was established through a merger


Figure 2.7 Matsushita: Spin-Ins to Implement Groupwide Restructuring
Matsushita Electric Industrial Co. (MEI)
67.8%

Matsushita
Graphic
Comm.

51.5%

56.3%

57.6%

Matsushita
Communication
Industrial

Kyushu
Matsushita
Electric

57.6%

Matsushita
Kotobuki
Electronics

Matsushita
Seiko

Listed on the Tokyo Stock Exchange


Oct. 1, 2002

MEI made five majority-owned subsidiaries into


wholly-owned subsidiaries by way of share exchanges
Matsushita Electric Industrial Co. (MEI)
100%

Matsushita
Graphic
Comm.

100%

100%

Matsushita
Communication
Industrial

Kyushu
Matsushita
Electric

100%

100%

Matsushita
Kotobuki
Electronics

Matsushita
Seiko

Jan. 1, 2003

Then, MEI implemented groupwide restructuring


Matsushita Electric Industrial Co. (MEI)
Automotive
electronics
related
divisions
Matsushita
Graphic
Comm.

Merger
Panasonic
Comm. &
Imaging

FA
Company

Env.
systems
related
divisions
Matsushita
Kotobuki
Electronics

Matsushita
Seiko

Matsushita
Kotobuki
Electronics

Matsushita
Ecology
Systems

Auto. Mobile System


multi solu media Comm. tions

FA
Div.

Panasonic
Automotive
Systems

Corporate
systems
related
divisions

Matsushita
Communication
Industrial

Kyushu
Matsushita
Electric
Car
navi gation

Corporate
Info. &
Comm.
Sales Div.

Panasonic
Factory
Solutions

Panasonic
Mobile
Comm.

In-house company

Panasonic
Systems
Solutions
In-house company

Source:ABeam Research

14

ABeam Research & Linklaters

Corporate Restructuring

Case Study 3: Thermo Electron's "De-Conglomerating" through Spin-Ins


In the early 1980s, the founder of U.S.-based Thermo Electron,

Kadant (former Thermo Fibertek) and Thermo Fibergen. Spectra-

George Hatsopoulos, began to carve out subsidiaries as publicly

Physics was spun into the company in 2002. These acquisitions

listed businesses. Using carve-outs, he hoped to increase the

enabled Thermo to undertake groupwide restructuring.

overall valuation of the group and inspire entrepreneurship.

After the acquisition of minority interests, Thermo implemented

Thermo completed 24 minority carve-outs between 1983 and

a groupwide restructuring. Thermo split into three independent

1998. The initial success of Thermo's carve-outs became an

publicly listed entities. The company spun off as a dividend to its

appealing model for other companies. Subsequently, however,

shareholders Kadant and Viasys Healthcare in 2001 (spin-offs are

the company structures became too complex and unmanageable

described in more detail in section 2.7). In addition, Thermo sold

(Figure 2.8).

several non-core businesses. As part of the sell-offs, the company

A new management team led by Richard Syron started the process

sold its interest in Thermo Cardiosystems in 2001. As a result of

of "de-conglomerating." The goal was to consolidate Thermo

the completion of spin-offs and sell-offs, Thermo's continuing

into one publicly traded entity focused on its core business of

operations consist solely of its instruments businesses.

measurement and detection instruments. In January 2000, Thermo

This case study highlights some of the disadvantages of minority

announced a major reorganization plan. During 2000, Thermo

carve-outs and the fact that minority carve-outs are perhaps

acquired the minority interest in all of its formerly publicly held

better thought of as an interim solution (minority carve-outs are

subsidiaries other than Spectra-Physics, Thermo Cardiosystems,

described in more detail in section 2.6).

Figure 2.8 Thermo Electron: Increased Complexity of the Company Structures

Shareholders
Thermo
Electron
85%

Thermo
Instrument
Metrika
Systems
76%

ONIX
Systems
81%

Thermo
BioAnalysis
84%

Thermo
Optek
95%

74%

86%

Thermedics

Thermo
TerraTech

Thermedics
Detections

The Randers
Killam Group

88%

96%

Sell-off

Thermo
Cardiosystems

Thermo
TerraTech

60%

71%

64%

Thermo
Trex

94%

Thermo
Ecotek

Thermo
Lase

91%

Sell-off

Thermo
Fibertek

79%

Sell-off

Thermo
Power

Thermo
Fibergen

80%

73%

Trex
Medical
77%

Thermo
Sentron
86%

Thermo
Voltek

Spin-Ins

69%

Shareholders

Thermo
Quest
90%

Thermo
Spectra

Thermo
Electron

92%

Kadant *

Viasys
Healthcare

*former Thermo Fibertek

Thermo
Vision
80%

Note: % reflects combined ownership by direct parent company and Thermo Electron as of year end 1998.

Source:Thermo Electron 10K, ABeam Research

15

ABeam Research & Linklaters

2.4

Corporate Restructuring

Corporate Splits

The corporate split procedure makes it easier for companies to

improve the control span of the parents management team by

split business units into new companies (or existing companies).

reducing parental involvement; and

Prior to the introduction of the corporate split procedure, it

accommodate differing personnel and compensation systems.

was possible for a company to split a business unit into a new

At the same time, such Bunsha-type splits enable a parent

subsidiary through either an investment-in-kind or a post-

company to unlock the value of a business unit by:

establishment transfer of business. However, the traditional

clarifying the business units responsibility and authority;

methods to complete such transactions were expensive and time-

providing a certain degree of autonomy to foster an indepen-

consuming procedures. For example, an asset valuation by a court-

dent culture;

appointed inspector was required. We call this type of corporate

expediting the business units decision-making to improve

split Bunsha-type splits.

business performance; and

In addition, the corporate split procedure makes it possible for the

enhancing visibility for customers, suppliers and potential alli-

first time for a transferee company to distribute its shares directly

ance partners or buyers.

to the shareholders of a transferor company. This type of corporate

More significantly, Bunsha-type splits facilitate the participation

split is broadly equivalent to the concept of a spin-off in the U.S.

of strategic partners who can provide necessary capabilities (e.g.,

or the concept of a demerger in the European market (spin-offs

by way of joint ventures, see section 2.9 and the Tomen case

are described in more detail in section 2.7).

study 10 below). Alternatively, Bunsha-type splits are commonly

The Matsushita case study 2 above and the NEC case study 4

used to prepare a business for divestiture. The Osaka Gas case

below show examples of restructurings that made use of different

study 6 below illustrates how corporate splits may be used to

types of corporate splits.

divest selected assets into a subsidiary in preparation for a selloff. Bunsha-type splits may be also used to establish a holding

Bunsha-type splits (whether in the traditional method or by a

company (i.e., a parent company splits its business units into new

corporate split which does not involve the distribution of shares

companies and the parent becomes a holding company). In many

directly to the shareholders of a transferor company) enable a

cases, a parent company establishes a holding company to manage

parent company to:

its business portfolio more efficiently (see the Japan Telecom case

focus on core businesses (see the Sumitomo Rubber case

study 7 below). These examples show that Bunsha-type splits are

study 5 below);

often interim solutions leading to more strategic transactions.

16

ABeam Research & Linklaters

Corporate Restructuring

Case Study 4: NEC's Restructuring through Corporate Splits


NEC recorded a 151 billion yen net loss in the fiscal year 1998

In April 2000, NEC formed three in-house companies (NEC

and since that time has been implementing a restructuring. NEC

Solutions, NEC Networks and NEC Electron Devices) to focus on

set the short-term goal of returning to profitability and the long-

solutions businesses. NEC has also completed many splits of non-

term goal of transforming NEC into a solutions provider. As part

core businesses through the corporate split procedure described

of the restructuring efforts, Packard Bell NEC was liquidated in

in section 2.4. Some of these splits are described below; these

November 1999, Elpida Memory, a DRAM joint venture with

splits include examples of transfers of business to new companies,

Hitachi, was established in December 1999 and NEC Home

newly created JV companies and existing companies both inside

Electronics was dismantled in January 2000.

and outside the NEC group.

Figure 2.9 NEC: Restructuring through Various Corporate Splits


Type

Examples of Corporate Splits

Transferring a business
to a new company

Split its Compound Semiconductor Device Division and transferred it to NEC Compound
Semiconductor Devices, a new subsidiary, in October 2001.
Split its microwave tube business and transferred it to NEC Microwave Tube, a new subsidiary, in
October 2002.
Split its color PDP business and transferred it to NEC Plasma Display Corporation, a new
subsidiary, in October 2002.
Splits its semiconductor business (except for DRAMs) and transferred it to NEC Electronics
Corporation, a new subsidiary, in November 2002.
Split its liquid crystal display (LCD) business and transferred it to NEC LCD Technologies, a new
subsidiary, in April 2003.

Transferring a business
to a new JV company

Established NEC Toppan Circuit Solutions, a new joint venture company with 55% contributed by
Toppan Printing and 45% by NEC, and transferred its printing wiring business in October 2002.

Transferring a business
to an existing company

Split capacitors, batteries and relays business from NEC Electron Devices, an in-house company
of NEC, and transferred it to Tokin Corporation in April 2002. Tokin allotted new shares to NEC in
exchange for the business. As a result, NEC increased its stake in Tokin from 40.6% to 66.6% and
Tokin was renamed NEC Tokin Corporation.

Source:ABeam Research

Case Study 5: Sumitomo Rubber's Splitting of its Non-Tires Businesses


Sumitomo Rubber Industries is Japan's third largest tire maker and

respectively (Figure 2.10). This reorganization will enable the

a major manufacturer of sporting goods and industrial products.

parent company to focus on its tire business and promote further

While the tire business posted operating income of 28.1 billion

restructuring in its non-tire businesses.

yen and the sporting goods business 6.4 billion yen in the fiscal
year 2002, the industrial products business caused an operating

Figure 2.10 Sumitomo Rubber: Corporate Splits to


Focus on Core Business

loss of 2.8 billion yen in the same year. Sumitomo Rubber


announced a restructuring plan in December 2002.

Tire
51%
Ohtsu Tire
business

As part of its restructuring initiatives, Sumitomo Rubber merged


with its 51% controlled subsidiary, Ohtsu Tire & Rubber, in July

Sumitomo Sporting
Rubber
good
business
(SRI)

2003. At the same time, using the corporate split procedure,

Industrial
products
business

Sumitomo Rubber split its sporting goods and industrial products


businesses into new subsidiaries, SRI Sports and SRI Hybrid,

Source:ABeam Research

17

Merger

Sumitomo
Rubber

July 1, 2003
SRI
Sports

SRI
Hybrid

ABeam Research & Linklaters

Corporate Restructuring

Case Study 6: Osaka Gas's Corporate Splits followed by Sell-Offs


In September 2001, Osaka Gas split its kitchen appliance

In October 2001, Osaka Gas sold 90% of its shares in Harman

business subsidiary, Harman, into three companies through the

Pro and 40% of its shares in Harman to Noritz, a leader in gas

corporate split procedure (Figure 2.11). The three companies

water heaters. One and a half years later, Osaka Gas sold its 50%

are: Harman Pro (manufacturing), Harman (sales) and Harman

stake in Harman to Noritz. Noritz now controls a 90% stake in

Planning (real estate).

both companies.
Figure 2.11 Osaka Gas: Corporate Splits for Later Sell-Offs

Osaka Gas

Osaka Gas
65.3%

100%

.....

OG Capital
OG Housing

100%

Sep. 1, 2001

6.4%

65.3%

OG Capital

.....

28.3%

OG Housing

65.3%

28.3%

Harman Planning

Harman Co.
Mfg

65.3%

6.4%

Harman

Harman Pro

Sales
Oct. 1, 2001

Osaka Gas
100%

.....

OG Capital
OG Housing

65.3%

60%

6.4%

10%

90%

Harman Pro

28.3%

Harman

Noritz

40%

Harman Planning
Apr. 1, 2003

Osaka Gas
100%

.....

OG Capital
OG Housing

65.3%

10%

10%

Harman Pro

6.4%
28.3%

Harman

90%

Noritz

90%

Harman Planning
Source:ABeam Research

Case Study 7: Japan Telecom's Use of a Holding Company as a Restructuring Vehicle


In December 2001, Japan Telecom initiated its "Project V"

Japan Telecom Holdings announced that, with the sale of Japan

restructuring plan to improve profits of its fixed-line business. In

Telecom Max, it has completed its program to dispose of all of its

August 2002, Japan Telecom established a new holding company

non-core assets. In August 2003, Japan Telecom Holdings further

structure under which it operates fixed-line, mobile and other

announced that it had reached agreement to sell its wholly-owned

businesses as separate subsidiaries (Figure 2.12). In March 2003,

fixed-line subsidiary, Japan Telecom, to Ripplewood Holdings.

Figure 2.12 Japan Telecom: Restructuring Under the Holding Company Structure
Japan Telecom Holdings Co.

Japan
Telecom

Japan
System
Solution

Telecom
Express

J-Phone

Sale to
Ripplewood

JENS

JT
Information
Services
Sale of telemarketing
business to JT Max
& Transfer to JT

JT Network
Information
Services

Telecom
Services

JT
Data

JT
Networks

Absorption into JT
Source:Japan Telecom Holdings

18

JT MAX
Sale to
Moshi Moshi
Hotline Co.

JT
America

Asahi
Telecom

JT
Engineering

JT Create

Sale of
assets to JT
& liquidation

Sale to Toho
Electrical
Construction

Sale of assets to
Toppan Forms &
liquidation

JT
UK

JT
Singapore

ABeam Research & Linklaters

2.5

Corporate Restructuring

Sell-Offs

A sell-off is the sale of a business or subsidiary of the parent company

Figure 2.13 Nissan's Sell-Offs of Subsidiaries to Buyout Firms

to another firm outside the group, generally resulting in a payment

Target
Company

of cash to the parent. In theory, sell-offs are the least complex of


restructuring structures.
Acquirers can usually be divided into two groups: strategic buyers

Nissan's
Form
Stake

Buyout Firms

Vantec

3i Group

66.7%

Niles Parts
Nissan
Transport

Ripplewood Holdings
AIG Japan Partners;
Tokyo Marine Capital

40.0%

Nissan Altia Fuji Management


NIF Ventures; Fuji Capital
IID Inc.
Markets (now Mizuho Capital);
New Business Investment
KIRIU
Unison Capital

and financial buyers. Strategic buyers are those who are interested
in acquiring a business for strategic purposes (e.g., increasing
market share, creating economies of scale or exploiting synergies).

Rhythm

Strategic buyers are typically companies engaged in the same

MBO

Date
Jan.'01

Buyout Apr.'01

100.0%

MBO

May'01

86.9%

MBO

Oct.'01

100.0%

MBO

Nov.'01

36.7%

MBO

Dec.'01

51.0%

MBO

Aug.'02

J.P. Morgan Partners

Source:ABeam Research

business as, and therefore competing with, the business or company


under consideration. In contrast, financial buyers are those who

Due to the pressure for banks to dispose of non-performing loans, it is

are interested in acquiring a business to secure a financial return in

expected that turnaround deals will increase dramatically over years

the short- to medium-term before selling the business or otherwise

to come. Consequently, the number of corporate turnaround funds

exiting the investment. Financial buyers are likely to be buyout firms.

has increased sharply and is expected to increase even further. For

Buyout firms raise funds in order to be able to take equity stakes

buyout firms, corporate turnarounds provide an important source of

in companies though funding and assisting with management

investment opportunities. Accordingly, most buyout firms have been

buyouts (MBOs) and leveraged buyouts (LBOs). Buyout firms

expanding their activities into corporate turnarounds.

generally focus on established companies with potential to grow

There are several types of buyout firms in Japan (Figure 2.14):

after transformation. Non-core divisions and subsidiaries of large

venture capital-affiliated buyout firms (e.g., JAFCOs Structured

public companies are their typical targets. For example, as part of

Investment Group);

its restructuring efforts, Nissan Motor sold its shares in at least 24

domestic independent buyout firms (e.g., Advantage Partners,

subsidiaries from 2000 to 2002. 17 were sold to strategic buyers

Unison Capital, MKS Partners);

and the remaining 7 were sold to buyout firms (Figure 2.13). It was

foreign independent buyout firms (e.g., Ripplewood Holdings,

expected that, like Nissan, large companies would sell off non-core

Carlyle Japan Partners);

divisions and subsidiaries as they pursued restructuring initiatives.

domestic principal investment firms (e.g., Nomura Principal

Fueled by expectations, the number of new buyout firms rose

Finance, Daiwa Securities SMBC Principal Investments, Mizuho

significantly. However, some buyout firms have been unable to find

Capital, Tokio Marine Capital); and

places to invest, as evidenced by the withdrawal of some such firms

foreign principal investment firms (e.g., Goldman Sachs, BNP

(e.g., 3i) from Japan.

Paribas, J.P. Morgan Partners).


Figure 2.14 Buyout Firms in Japan
Transformation

Corporate Life Cycle

Turnaround

Start-Up

Start-Up

Transformation

Traditional Venture Capitals

Traditional Buyout Firms

Turnaround
Turnaround Funds

Extended Venture Capitals (e.g., JAFCO)


Extended Buyout Firms
e.g., Advantage Partners, Unison Capital, MKS
Partners, Ripplewood Holdings, Carlyle Japan Partners

Principal Investment Firms


e.g., Nomura Principal Finance, Daiwa Securities SMBC Principal Investments, Mizuho Capital,
Tokio Marine Capital, Goldman Sachs, BNP Paribas, J.P. Morgan Partners
Source: ABeam Research

19

ABeam Research & Linklaters

2.6

Corporate Restructuring

Equity Carve-Outs

An equity carve-out is the sale of an equity interest in a subsidiary

in difficult markets, a minority carve-out may impede a selling

to public investors in an IPO or to professional investors in a

strategy by setting a price for the shares of the subsidiary which is

private placement.

below their "real" value; and


a minority carve-out may reduce the flexibility with which the

Equity carve-outs come in two forms: minority carve-outs and

parent and subsidiary can cooperate to capture synergies.

majority carve-outs. A minority carve-out occurs when a parent


company sells a minority interest in a wholly-owned or majority-

The parent should anticipate that a minority carve-out is often an

owned subsidiary to investors while retaining the majority interest.

interim solution. In most cases, a minority carve-out is later followed

A majority carve-out involves the sale of a majority interest in a

by another transaction, such as a sell-off, follow-on public offering or

wholly-owned or majority-owned subsidiary to investors. It should be

spin-off. In practice, a minority carve-out is likely to lead to complete

noted that the preparation for either an IPO or a private placement to

separation over time because the carved-out subsidiary tends to drift

professional investors takes longer than that for a sell-off. In addition,

away from and interact less with the parent due to its independence.
In addition, the carved-out subsidiary, if it becomes a publicly listed

a parent company will have to ensure that a carved-out subsidiary

company, will issue its own financial statements and establish a

should be a viable independent company. This is often the most

public market value, resulting in the increased possibility of a merger

difficult part of the preparation for an equity carve-out.

(or takeover) offer. A minority carve-out IPO may be combined with

Minority carve-outs have the following benefits, among others:

a later spin-off (such two-stage spin-offs, which are particularly

after a minority carve-out, the parent company continues to remain

popular in the U.S., are described in more detail in section 2.7).

in control of the subsidiary;

If unsuccessful, the minority carve-out may be followed by a

a minority carve-out allows the parent company to take advantage

spin-in, i.e., the parent company acquires the shares held by minority

of a high valuation of part of its operations and provides opportu-

shareholders and turns the majority-owned subsidiary into a wholly-

nities to raise capital on advantageous terms;

owned subsidiary (see the Thermo Electron case study 3 above).

if the minority carve-out unlocks value and a higher-rated or

When a substantial or complete separation is desired, a majority carve-

higher value stock is created (in aggregate), the stock of the

out may be implemented (again usually by way of an IPO or private

parent company (or subsidiary) has more value as an acquisi-

placement). A majority carve-out is beneficial in the following ways:

tion currency;

a majority carve-out may generate substantial cash for the parent

a minority carve-out gives the subsidiary time to become a stron-

and/or the subsidiary;

ger company before a sale or majority or full carve-out;

a majority carve-out may allow the parent to terminate its respon-

a minority carve-out may create business opportunities for the

sibility toward the subsidiary;

subsidiary by demonstrating that the subsidiary will be an inde-

a majority carve-out means that there will be fewer potential con-

pendent business; and

flicts of interests between the parent and the subsidiary after the

a minority carve-out IPO allows the subsidiary to offer market-

carve-out than is the case with a minority carve-out;

linked or other equity incentives to management.

notwithstanding that it will only be a minority shareholder, the

Minority carve-outs also have disadvantages. These include:

parent may maintain a significant influence on the subsidiary after

the parent company maintains control of the subsidiary, which

the carve-out; and

may cause a potential conflict of interests with the minority share-

a majority carve-out allows continued financial participation by


the parent.

holders of the subsidiary;


if the initial public float (i.e., the value of shares available for

Disadvantages of a majority carve-out include:

public investors in the IPO) is too small, it may fail to attract insti-

neither the parent nor its shareholders will participate fully in the

tutional investors;

upside of the subsidiary; and

small public floats may increase the volatility of the stock;

the parent will lose control over the subsidiary after the carve-out.
20

ABeam Research & Linklaters

2.7

Corporate Restructuring

Spin-Offs

A spin-off (or demerger) often consists of the distribution of a

business model. This poses a major challenge for all spin-offs. In

subsidiary's stock to the parent company's existing shareholders

addition, spin-offs have disadvantages, including the following:

by way of a dividend. A spin-off has become an increasingly

unlike an equity carve-out or a sale for cash, neither the parent

popular way of undertaking corporate restructuring in the U.S.

company nor the subsidiary receives any cash in the transac-

and Europe (see the Thermo Electron case study 3 and the GM

tion itself;
the parent company loses the income and cash flow of the sub-

case study 13). The main reason for the popularity of spin-offs in

sidiary without receiving any cash in return;

the U.S. and Europe is that the distribution can often be made tax-

unlike a carve-out IPO, the shares are distributed to the parent's

free for both the parent corporation and the receiving shareholder.

shareholders as a dividend and therefore the parent company

This can represent significant savings to the parent company.

may not work hard to create investor interest in the stock as

In Japan, the corporate split procedure allows a transferee

much as in a carve-out IPO; and

company to distribute new shares as consideration directly to

if the spun-off subsidiary fails to meet their investment criteria

the shareholders of the transferor company. However, spin-offs

(e.g., minimum size of market capitalization or portfolio hold-

have been rarely executed to date. This may be because spin-offs

ings), institutional investors of the parent company may sell

are only tax-free for Japanese companies if they are executed as

the shares distributed to them in the spin-off.

part of reorganization within the group or reorganization for the


purpose of a joint venture. Otherwise, spin-offs are taxable and

Although spin-offs are currently rare in Japan, the results of our

hence have been executed only in special cases (see the Chugai

survey revealed that many companies found potential merits

case study 8 below).

in spin-offs (see Figure 2.15). 84% of our respondents believe


that spin-offs are a unique measure offering several advantages

Spin-offs are a means to unlock the value of a subsidiary and

over alternatives. 60% of our respondents believe that, unlike

transfer that value directly to the parent company's shareholders.

Bunsha-type splits, spin-offs enable a parent to focus more

It is especially useful for a subsidiary that does not completely

completely on core businesses and allow a subsidiary to become

fit with the parent company's core activities or would otherwise

fully independent from the parent company and develop its own

benefit from being a stand-alone public company. Spin-offs

business strategy. Where spin-offs can be structured so that they

are also a means to obtain full value for the parent company's

incur no tax, we expect them to become a more widely accepted

shareholders when a spun-off subsidiary is viable but will not

method of implementing corporate restructurings in Japan.

command a reasonable price in a cash divestiture because of


market conditions.

Figure 2.15 Potential Advantages of Spin-Offs

Where the shares of the parent company are publicly listed, in

Spin-offs provide a valid IPO


alternative in difficult market

order to ensure that the parent company's shareholders can realize

Spin-offs enable the parent's


shareholders to retain
the value of a subsidiary

the value of the distribution, the shares of the subsidiary generally


need to be (or become) publicly listed to give the shareholders

0.0%

11.6%
Spin-offs separate
a subsidiary from the 11.6%
parent's balance sheet

the same liquidity in the shares in the subsidiary as they have in


the shares of the parent, i.e., the parent will need to seek a public

Spin-offs have no
advantages over 16.3%
alternatives

listing for the new shares.


As is the case with equity carve-outs, the spun-off subsidiary must

Source:ABeam Research

be a viable stand-alone entity to create shareholder value. This


means that it must have a strong capital structure and a viable

21

Spin-offs create a
focused parent and
a fully independent
subsidiary
60.5%

ABeam Research & Linklaters

A carve-out IPO may be combined with a later spin-off. Such two-

Corporate Restructuring

companies with small public floats are less attractive to institu-

stage transactions have become a common means of implementing

tional investors; and

a spin-off in the U.S. (see the GM case study 13 below).

a depressed stock price may prevent the parent from undertaking the subsequent spin-off.

The advantages of such two-stage transactions include the


following:

A split-off is a variant of a spin-off. In a split-off, a parent

the IPO establishes a public market for the subsidiarys stock

company distributes shares it owns in a subsidiary to its

in advance of the spin-off;

shareholders in exchange for their shares of the parent. A split-off

the scrutiny which comes with being a publicly listed company

is a way to create value for the parent's shareholders by reducing

should make the subsidiary a stronger company; and

the parent's outstanding shares. Reducing the parent's shares

the IPO generates cash for either the parent company or sub-

outstanding increases the earnings and cash flow per share and,

sidiary or both.

thereby, the value of the remaining shares.

The disadvantages of these two-stage transactions are similar to

A split-up is a form of split-off where a parent company is

those of minority carve-outs, including:

broken up into two or more independent companies. In the

the IPO is dependent on equity market conditions;

split-up, a parent company is often liquidated and the parent

preparing for and implementing the IPO is time consuming;

company's shareholders become shareholders of each of the new


independent companies.

Case Study 8: Chugai's Reactive Spin-Off to Avoid Anti-Trust Issues


Chugai Pharmaceutical merged with Nippon Roche, a wholly-

Figure 2.16 Chugai Pharmaceutical: Gen-Probe Spin-Off

owned subsidiary of Roche Pharmholding, so that Roche became

Chugai
shareholders

Chugai's parent company, in October 2002. Prior to the merger,

Chugai
shareholders

Chugai resolved to spin off its wholly-owned U.S. subsidiary,

Gen-Probe
shares

Gen-Probe, and completed the distribution of Gen-Probe shares

Chugai

to Chugai's shareholders in September 2002 (Figure 2.16). The

Chugai

Gen-Probe began
trading on the NASDAQ
on Sept. 16, 2002

100%

purpose of the spin-off was to avoid anti-trust problems over

Gen-Probe

Chugai's merger with Nippon Roche.


Chugai decided on a spin-off through capital reduction with

Gen-Probe was spun-off from


Chugai on September 16, 2002.

Source:ABeam Research

compensation. Upon the capital reduction, each of Chugai's


shareholders was allotted 0.086 shares in Gen-Probe for each
Chugai share. The spin-off was taxable at the parent level.
The distribution was also taxable as a deemed dividend for the
Japanese shareholders of Chugai receiving the shares. Chugai paid
a cash distribution to cover Japanese withholding taxes.
This case study provides an example of using the spin-off method
to address regulatory issues.

22

Gen-Probe

ABeam Research & Linklaters

2.8

Corporate Restructuring

Tracking Stocks

Tracking stock is a class of parent company common stock that

The disadvantages of a tracking stock include the following:

provides a return to investors linked to the performance of a

the parent company issuing a tracking stock must create financial

particular business unit within the parent company. Under the

"firewalls" between the business and the rest of its operations;

Code, prior to the amendment in April 2002, it was possible for

the parent company will shoulder the administrative burden in

Japanese companies to issue tracking stocks. For example, in June

connection with a tracking stock;

2001, Sony issued the first tracking stock in Japan (see the Sony

a company that issues a tracking stock creates the potential for

case study 9 below). However, the amendments in April 2002 now

a conflict at the board level between the interests of the two

allow Japanese companies to issue stocks with various dividend

sets of shareholders; and

payments and voting rights. Although the April 2002 amendment

investors may not give as much value to the tracking stock as

has made it easier for a company to issue tracking stocks, no other

if shares represented a direct ownership interest in the assets of

Japanese company has yet followed Sony's lead.

the tracked business.

Tracking stocks are a very different solution to the others

Tracking stocks are often terminated when the circumstances and

discussed in this paper. In theory, it can create many benefits for

objectives of the business and/or parent company change and

both the parent company and the subsidiary. A tracking stock does

consequently the parent company decides to sell, spin off or spin

not require the parent company to make the tax, legal, governance

in the tracked business.

and organizational changes required for an equity carve-out or

According to the results of our survey, 31% of respondents say

spin-off (e.g., no separate board of directors is required). This

they intend to examine the possibility of issuing tracking stocks

provides the main appeal to the parent company over other

in the future (Figure 2.17). Our study also identified the perceived

alternatives.

merits of issuing tracking stocks. Half of our survey respondents

There are other advantages to using tracking stocks, including

believe that a tracking stock would enable them to raise capital

the following:

without losing control over the subsidiary.

the parent company continues to control the business unit and


maintain ownership of its assets;

Figure 2.17 Tracking Stocks

a tracking stock can raise capital on attractive terms;

Interest in
Tracking Stocks

a publicly listed tracking stock establishes a market value for

Potential Merits

Providing stock incentives


to management of the
Others
subsidiary
5.0%
Using the
31.1%
tracking stocks 5.0%
Examine the
as acquisition
possibility of
7.5%
currency
50.0%
issuing tracking
68.9%
stocks in the future
Raising capital
without losing
32.5%
Feel no need
control over the
to issue tracking
Unlocking the value subsidiary
stocks
in the underlying
subsidiary

the business to which management compensation programs


can be tied;
a tracking stock preserves the operating benefits of a single,
integrated corporation; and
the parent company may use the tracking stock as acquisition currency.

Source:ABeam Research

23

ABeam Research & Linklaters

Corporate Restructuring

Case Study 9: Sony's Issuing of the First Tracking Stock


In November 2000, Sony Corporation announced that the

Figure 2.18 Sony: Stock Performance

company had begun preparations to issue a new class of stock

+100

linked to the performance of Sony Communication Network


(SCN). SCN is a wholly-owned subsidiary of Sony, engaged in

The SCN tracking


stock has not
outperformed Sony

+50

internet-related businesses. Sony believed that a tracking stock


would enable the company to realize the value of SCN while

0
Sony

maintaining full parent ownership.


-50

SCN

Though the company planned to issue the tracking stock by the


1999/1

end of March 2001, Sony postponed the issuance because of the

2000/1

2001/1

2002/1

2003/1

Source:Yahoo! Finance

depressed stock market. In June 2001, Japan's first tracking stock


was listed on the first section of the Tokyo Stock Exchange. There
was, however, a lack of enthusiasm amongst investors. Figure
2.18 demonstrates the performance of SCN tracking stock against
that of Sony itself. As can be seen, the SCN tracking stock has not
outperformed the parent company. Issuing the first tracking stock
resulted in disappointment to both Sony and shareholders.

2.9

Joint Ventures

When well crafted, joint ventures can achieve many of the same

As mentioned in section 2.5, buyout firms are active buyers of

objectives for the parent company as an acquisition of the other

non-core subsidiaries of large public companies. Although joint

company, including access to the resources and capabilities of the

ventures are not their traditional business model, buyout firms

joint venture partner, but at a lower cost and without many of the

today may be interested in forming joint ventures. Such buyout

risks associated with an acquisition (see the Tomen case study

partnerships can be used as a means of divesting non-core

10 below). Consequently, the parent can increase the value of a

businesses when a cash sale is unavailable or undesired.

subsidiary by way of a joint venture. Successful joint ventures are

The advantages of a buyout partnership for the parent company

often followed by IPOs.

and the subsidiary include:

Joint ventures may be also used as a means of divesting a business

experienced buyout firms can greatly assist in building the sub-

(see the Takeda case study 11 below). The first step is the creation

sidiary, recruiting a management team, forming relationships

of a joint venture with a strategic partner. Often the strategic

with customers and setting business strategy;


buyout firms invest cash into the subsidiary and assist in fund-

partner controls a major stake (i.e., over 50%) in the joint venture

ing key business initiatives; and

company. The second step is the acquisition of the minority shares

the involvement of experienced and respected buyout firms

of the joint venture company by the strategic partner.

may be a significant asset to the subsidiary in a later IPO.

Such two-stage transactions provide the acquiring partner with


benefits, including the following:

The challenges of a buyout partnership for the parent company

a means to encourage the partner to assist in building the business;

and the subsidiary include:

a means to get to know the business before a subsequent acqui-

most subsidiaries will not meet the criteria for a buyout investment; in particular, a buyout firm may not invest in an entity

sition; and

when the parent company controls its strategic direction; and

a means to lay the groundwork for smooth integration after a

buyout firms are usually interested in executing an exit strategy

later acquisition.

within a reasonable time frame.


24

ABeam Research & Linklaters

Corporate Restructuring

Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth


Tomen Corporation, a general trading house, announced a

Energy Holdings Corporation. TEPCO is expected to bring

restructuring plan in 1998 and has recently been intensifying

complementary expertise, resources and capabilities that will

its restructuring efforts. In December 2002, Tomen announced

propel growth in the wind power generation business.

a medium-term management plan to implement further

This case study shows that where external capabilities need to be

restructuring. As part of the plan, Tomen will complete

provided to a subsidiary, a corporate split may be a first step in

management integration with Toyota Tsusho. Tomen also received

the facilitation of a joint venture to allow such capabilities to be

significant debt forgiveness from UFJ Bank.

provided.

In November 2001, Tomen split part of its Power & Utility


Projects Division and established a new wholly-owned subsidiary,

Figure 2.19 Tomen: A Corporate Split to Facilitate


the Formation of a Joint Venture

Tomen Power Holdings Corporation, through the corporate

Sale of TPHC shares

split procedure described in section 2.4 (Figure 2.19). The new

Tomen

company is involved in worldwide development of wind power

Power &
Utility
Projects
Division

generation business. The objective of the split was to facilitate the


participation of strategic partners in the business.

Tomen

Tomen

Nov. 1, 2001

Sep. 30, 2002


100%

Tomen Power
Holdings Corp
(TPHC)

In September 2002, Tomen sold a 50% stake in Tomen Power


Holdings to Tokyo Electric Power Company (TEPCO). At

TEPCO*

50%

50%

Eurus Energy
Holdings Corp.

*Tokyo Electric Power Company


Source:ABeam Research

the same time, Tomen Power Holdings was renamed Eurus

Case Study 11: Takeda's Sell-Offs of Non-Core Businesses through Joint Ventures
Takeda Chemicals have established three joint venture companies

In April 2002, Takeda and Kirin established Takeda Kirin Foods

with the intention of leading to a later divestiture of these non-

in the food business, producing mainly seasonings and flavor

core businesses. In April 2001, Takeda established Mitsui Takeda

enhancers. Kirin has a 51% stake in the new company and

Chemicals, a urethane chemicals joint venture company, with

Takeda 49%. Kirin plans eventually to acquire all of the shares.

Mitsui Chemicals. Mitsui acquired 51% and Takeda 49%. Mitsui

In November 2002, Takeda and Sumitomo formed Sumitomo

is scheduled to purchase Takeda's shares in the joint venture five

Chemical Takeda Agro Company in the agrochemical business.

years after start-up.

Sumitomo controls a 60% stake in the joint venture and Takeda


40%. Sumitomo plans to acquire Takeda's shares in the joint venture

Takeda entered into similar joint venture agreements with Kirin

after the expiry of the five-year joint venture period (Figure 2.20).

Brewery and Sumitomo Chemical.

Figure 2.20 Takeda Chemical: Joint Ventures to Be Followed by Sell-Offs


Sale of shares
Takeda
Chemical
AgroChemical
business

Sumitomo
Chemical

Takeda
Chemical

Sumitomo
Chemical
5 years later

Nov. 1, 2002

Takeda's agrochemical business has


been transferred to a new JV company

40%

60%

Sumitomo
Chemical Takeda
Agro Company

Source:ABeam Research

25

Takeda
Chemical

Takeda will sell


the remaining 40%
to Sumitomo
after 5 years

The JV company will be made a whollyowned subsidiary of Sumitomo Chemical

Sumitomo
Chemical

100%

New Co.

ABeam Research & Linklaters

Corporate Restructuring

2.10 Summary
In this chapter, we have reviewed in depth alternative divestiture

Figure 2.21 Possible Migration in Restructuring Structures

structures, including sell-offs, carve-outs, and tracking stocks.

Japan Telecom (case study 7)

Sell-Offs

We have also looked at spin-ins, corporate splits and joint

Osaka Gas (case study 6) Takeda (case study 11)

ventures. These are the key ways in which companies can prepare
businesses for divestiture. We believe divestitures will play an

Joint Ventures

increasingly crucial role in corporate restructuring in Japan.

Osaka Gas (case study 6)


Tomen (case study 10)

Corporate splits, joint ventures and minority carve-outs are often

Majority CarveOut IPOs


(Follow-on POs)

Corporate Splits

used as interim solutions toward an eventual exit (Figure 2.21). In


Japan the most common exit alternatives are sell-offs and full or
majority carve-outs.

Spin-Offs

Minority
Carve-Out
IPOs

In the U.S. and Europe, spin-offs (including minority carve-outs


followed by a spin-off) are among the most popular structures

Matsushita (case study 2) Thermo (case study 3)

Spin-Ins/Mergers

used to implement a corporate restructuring. Japanese companies,


however, generally cannot receive the tax benefits of spin-offs, i.e.,

Taxable transactions and therefore rarely implemented in Japan


Source:ABeam Research

although the legal barriers have been removed, the tax disincentive
remains. If spin-offs could be made tax-free, we believe that it
would encourage companies to consider spin-offs and lead to
more corporate restructurings using this structure in the same way
as the introduction of the corporate split procedure has led to more
corporate restructurings by facilitating the separation of parent
companies' businesses.
Some of the most successful corporate restructurings have been
where parent companies have prepared exit strategies at the start
of the corporate restructuring process and have used interim
solutions as a means to develop stronger subsidiaries before a full
exit at a later date (see the GM case study 13 below).

26

ABeam Research & Linklaters

Corporate Restructuring

3. Achieving Value-Building Growth


Corporate restructuring is not an end in itself but rather a means

Figure 3.1 Growth Through Restructuring


Asset Growth (g)

building growth over the long term. Once the financial situation
has been stabilized and profitability in core businesses has been
improved, the next challenge is to move toward value-building
growth (Figure 3.1). In this chapter, we will turn our attention to

3.1

Asset Growth (g)

value-building growth through restructuring.

Common Obstacles to Restructuring

It is generally accepted that many Japanese companies have

Business
Rebuilding

+
0
-

0
+
Return (ROE-Ke)

Financial
Restructuring

Asset Growth (g)

for companies with underperforming businesses to achieve value-

0
-

0
+
Return (ROE-Ke)

tended to restructure only reactively in response to pressure and

Value-Building
Growth

0
-

0
+
Return (ROE-Ke)

Source:ABeam Research

have preferred to delay restructuring initiatives until action has


become unavoidable. The results of our survey identified the most

result of a change in a company's leadership. It is interesting to

common obstacles to restructuring success (Figure 3.2).

note that a successful turnaround of Nissan was achieved under

66% of our respondents recognize employment security is a major

the leadership of a foreigner, Carlos Ghosn. Needless to say,

obstacle to restructuring success. Even though lifetime employment

incumbent management can achieve the same results if it can

and seniority-based promotion are gradually becoming less common

overcome organizational constraints.

in Japan, saving jobs, even at the expense of shareholder interests,

40% of our respondents said that they believe that executives'

continues to sway executive decision-making.

disregard for shareholder value hampers restructuring success.

53% of our respondents regard concern for constraints of internal

When Japanese companies divest their businesses, those

politics and long-held tradition as a major obstacle. Restructuring

businesses are often incurring heavy losses as a result of several

efforts can fail because the initiatives are not followed group-

years of poor performance. This demonstrates that executives can

wide and are changed shortly after announcement, when politics

be reluctant to divest underperforming businesses, even when they

and tradition stand in the way. Many restructurings happen as a

know that the divestiture will maximize the value for shareholders.

Figure 3.2 Obstacles to Restructuring


0%

10%

20%

30%

40%

50%

60%

Higher priority on securing employment

66.0%

Difficulty of making a break with internal politics


and tradition

53.2%
40.4%

Limited concern for shareholder value creation


Firm orientation toward a self-contained entity

31.9%

Lack of strong leadership

23.4%

Biased sense of parent-subsidiary relations

21.3%

Weak corporate headquarters running the whole group

21.3%

Shortage of capable outside experts


Others

70%

4.3%
2.1%

Source:ABeam Research

27

ABeam Research & Linklaters

3.2

Corporate Restructuring

Future of Corporate Restructuring


splitting business units into subsidiaries through Bunsha-type

The results of our survey indicate that creating shareholder value


is becoming a more common objective for Japanese companies.

splits (21.3%42.6%);

At the same time, perhaps as a result of this development, equity

reorganizing business units/subsidiaries through corporate

redeployment transactions are becoming more common and

splits (23.4%38.3%); and

more widely accepted. Accordingly, we believe that current

carving out subsidiaries through an IPO (14.9%27.7%).

restructuring trends will continue in the future. The results of our

Although not equity redeployment in the strict sense, we also

survey bear this out: reorganization of subsidiaries by increasing

expect to see an increase in the number of acquisitions of

parent ownership or executing spin-ins will slow down over the

non-group companies using the share exchange method (2.1%

next three years (Figure 3.3). Instead we expect to see an increase

27.7%).

in equity redeployment transactions, including the following:

Figure 3.3 Restructuring Structures to Be Used Over the Next Three Years
Over the past three years
0%

20%

40%

60%

80%

100%
91.5%
91.5%

Closure of unprofitable businesses

Over the next three years

55.3%
59.6%

Sale of subsidiaries to companies outside the group


Creation of a JV with companies outside the group

55.3%
44.7%
46.8%

Sale of businesses to companies outside the group


Split of business units into subsidiaries through
corporate split procedure

21.3%
42.6%
40.4%
38.3%

Purchase of businesses from companies outside the group


Reorganization of business units/subsidiaries
through corporate split procedure

23.4%

38.3%
42.6%
36.2%

Cash acquisition of companies outside the group


Increase in the size of controlling stakes in subsidiaries

29.8%

55.3%

36.2%
27.7%

Dissolution of a JV with companies outside the group


Carve-outs of subsidiaries as publicly traded
businesses
Acquisition of companies outside the group
through share exchange procedure

80.9%

14.9%
2.1%

27.7%
27.7%
34.0%

Spin-ins of subsidiaries through share exchange

21.3%
12.8%
14.9%

Merger with companies outside the group


Sale of businesses/subsidiaries through MBO

10.6%
12.8%

Sale of businesses/subsidiaries to buyout funds

6.4%
12.8%

Creation of a holding company through share


exchange/share transfer procedures

6.4%
12.8%
indicates a significant increase in usage.

Source:ABeam Research

28

ABeam Research & Linklaters

3.3

Corporate Restructuring

Key Factors for Successful Restructuring

The most successful restructurings have been where a parent

3.4, our survey results identified the three most important success

company and its subsidiary have followed a well-planned and well-

factors as: specific objectives (4.83, where 5=most important);

organized process to ensure the best outcome. As shown in Figure

leaders' commitment (4.66); and growth planning (4.43).

Figure 3.4 Key Factors for Successful Restructuring


Performance rating
Importance rating
1

Setting specific short- and long-term objectives to be


achieved through restructuring

5
4.83

3.96
4.66

Demonstrating leaders' commitments to restructuring

3.98
4.43

Planning growth scenarios after restructuring


in advance

3.50
4.19

Defining core businesses and focusing on them

3.80
4.13

Developing a restructuring plan toward


superior shareholder value

3.39

Executing restructuring in a swift


and intensive manner

3.39

Assessing restructuring alternatives and selecting


the best option

3.39

4.13

3.98

3.94

Finding the right partners to complete the transactions

3.30

Monitoring the progress of a restructuring plan on


a regular basis

3.91
3.48

Setting objective criteria to identify candidates


for restructuring

3.83
2.91

Sharing a restructuring plan across the group


organizations

3.74
3.20
3.15
3.11

Involving external advisors in the restructuring process

indicates high importance rating (>average=4.1)


but low performance rating (<average=3.5).
Source:ABeam Research

Our study also revealed self-assessment of performance against

Figure 3.5 Importance-Performance Matrix


5.0

each factor. The highest rated factors are: leaders' commitment


(3.98, where 5=fully implemented); specific objectives (3.96); and

4.5

Degree of Performance

core focusing (3.80).


Linking importance rating to performance rating casts a spotlight
on the challenges, i.e., crucially important factors in which
companies underperform to the greatest extent (Figure 3.5). These
factors are growth planning, value creation and swift restructuring.

Setting objectives
Demonstrating commitments
Defining core

4.0
3.5

Monitoring progress

average

3.0

Finding partners
Involving advisors

Sharing a plan
Assessing alternatives
Setting criteria

High importance
but
average low performance

2.5
2.0
2.0

2.5

Source:ABeam Research

29

Planning growth
Developing a
value-creating plan
Executing swiftly

3.0

3.5

4.0

Degree of Importance

4.5

5.0

ABeam Research & Linklaters

3.4

Corporate Restructuring

Managing Balanced Business Portfolios

Just as each company has its own corporate life cycle, each

Figure 3.6 Balanced Business Portfolios

business has its own business life cycle. A business life cycle

Operate

contains four phases (Figure 3.6). In the "seed" phase (phase I),

Transform

Grow

a growth option is seeded. The "grow" phase (phase II) is about


nurturing the option and growing the business. In the "operate"

Seed

phase (phase III), the emphasis shifts from growing the business
Business Life Cycle

to managing it for profitability. A business in this phase is usually


called a core business. Finally, if the business begins to decline,
High

the "transform" phase (phase IV) seeks to reverse the trend and

A company's business portfolio typically consists of multiple


businesses in various phases of the business life cycle. To
achieve value-building growth, companies must develop and
maintain balanced business portfolios. No growth can be

Seed

Grow
Low

achieved without having strong core businesses; cash flows

Funding

Medium

Growth Expectation

regenerate growth.

Core

generated by core businesses are essential to fund for growth


initiatives. Yet strong core businesses alone do not guarantee

Small

Medium

Operate

Profit Generation

value-building growth. What is needed is a continuous stream

Source:ABeam Research

of new growth options in phase I and new businesses in phase


II. Companies must seed numerous growth options and nurture
promising options to generate new streams of revenue for the
future. Successful value-growing companies boast balanced
portfolios that contain growth options and new businesses to
supplement their strong core businesses.
In the current market environment, the "focus is better" or "back
to core" argument has become more generally accepted. In many
cases, financial problems stem from premature departure from
core businesses and excessive diversification in pursuit of new
opportunities. When this happens, in order to stabilize the financial
situation, companies must then reduce diversification to refocus
on core businesses. However, the "focus is better" argument is not
always the right answer. It should be noted that core and non-core
arguments are relatively static and core businesses will eventually
mature and decline. When core businesses mature and there are no
growth initiatives in the business portfolios, a company's growth
will slow and ultimately stall. The challenge for companies is
to strike a balance between focusing on core businesses and
developing and nurturing growth initiatives.

30

Large

ABeam Research & Linklaters

3.5

Corporate Restructuring

Pruning the Portfolios through Proactive Divestitures

To develop and maintain balanced portfolios, the challenge is to

underperforming or non-core businesses can often release tied-up

nurture promising options while reviewing frequently the growth

resources and thus can create capacity for growth.

potential of each business and divesting quickly underperforming

We believe that the two cornerstones of successful divestitures are:

businesses with diminishing potential or distracting non-

deliberate use of interim solutions to an eventual exit; and

core businesses (Figure 3.7). Growth initiatives call for

laying the groundwork for creating a stand-alone entity.

funds, management time and other resources. Divestitures of

Figure 3.7 Divestitures across Life Cycle Phases


Operate

Seed

X
X

Medium

Grow
Grow

Divestitures
Grow

X
X

Seed
Low

Growth Expectation

High

Business Life Cycle

Divestitures
Small

Medium

Operate

Options
Large

Profit Generation
Source:ABeam Research

3.5.1 Deliberate Use of Interim Solutions to an Eventual Exit


As we explained in section 2.10, transactions such as corporate

applies only to business units or subsidiaries which are likely to

splits, joint ventures and minority carve-outs are often only

find buyers at acceptable prices. Unfortunately, underperforming

intermediate steps to eventual exit alternatives, the most

businesses often find trouble making this case (see the Hitachi

common of which in Japan are sell-offs and full or majority

case study 12 below).

carve-outs. We believe spin-offs would also be popular in Japan

As a further interim solution, before implementing a full exit

if the tax disadvantages were removed. After executing such

strategy, companies may consider minority carve-outs or joint

exit strategies, the parent company no longer holds a significant

ventures. As can be seen in the results of our survey, joint ventures

stake in the subsidiary. In order to execute such exit strategies

have been used extensively in Japan. To date, most joint ventures

successfully, the split business or subsidiary generally needs to

have been designed to contain and share risks when entering new

be a strong company that can survive as a viable stand-alone

markets. Takeda Chemical's recent joint ventures, in contrast, were

company, at least where the chosen exit alternative is an equity

formed with the aim of a later divestiture of non-core businesses

carve-out or spin-off.

(see the Takeda case study 11 above).

In many cases, Japanese companies split their underperforming

As divestitures become more popular, we believe that Japanese

businesses into new subsidiaries by way of corporate splits before

companies will increasingly use such interim solutions to create

a future sell-off or full or majority carve-out. Such an approach

viable stand-alone subsidiaries.

31

ABeam Research & Linklaters

Corporate Restructuring

Case Study 12: Hitachi's Difficulty in Finding Buyers


In November 1998, Hitachi unveiled a three year-plan (fiscal 1999

In January 2003, Hitachi launched a new plan (fiscal 2003 to

to 2002), "i.e.HITACHI Plan." The plan set the growth vision

2005), "i.e.HITACHI Plan II", calling for a thorough restructuring

of becoming the "best solution partner". Under the plan, Hitachi

of its business portfolio. In the early phase of the new plan,

split its Consumer Products Group and Industrial Components

Hitachi will exit underperforming businesses altogether amounting

& Equipment Group into two new subsidiaries in April 2002.

to 20% of its 8 trillion yen consolidated sales, while focusing

They were Hitachi Home & Life Solutions and Hitachi Industrial

on two business domains: "new era lifeline support solutions"

Equipment Systems. Hitachi also completed splits of businesses,

and "global products incorporating advanced technologies". It

including the display, printer, telecommunications equipment,

has been publicly reported that approximately 30 money-losing

substation and system LSI businesses. However, none of the split

businesses have been listed for divestiture. However, since the

businesses have been divested.

plan was announced, no divestitures have been made. The greatest


challenge confronting Hitachi seems to be finding suitable buyers
for underperforming businesses.

3.5.2 Laying the Groundwork for Creating a Stand-Alone Entity


In mergers and acquisitions, two distinctly separate organizations

is a valuable executive tool. However, in Japan, it is widely

come together to create a whole. It is widely recognized that the

accepted that there is a strong bias against divestitures and that

success of mergers and acquisitions depends on effective post-

when parent companies make a divestiture, they tend to do so

merger integration. The most successful companies link M&A

reactively, usually in response to pressures on the parent company

strategy, pre-merger decision-making and post-merger integration.

or subsidiary and sometimes only after the parent company or

Planning and structuring for integration early on increases the

subsidiary has suffered from weak performance for a period

likelihood of M&A success. Companies that have achieved

of time. Such reactive divestitures often have to be conducted

successful integration have often launched task teams that work

quickly and are therefore typically less well-planned and executed.

on solutions to specific issues for defined periods of time. These

As a result, such reactive divestitures are unlikely to secure the

teams may be coordinated by a steering committee that sets

best price for an asset.

objectives, reviews team decisions, resolves disputes and provides

One example of a well-planned and executed divestiture is

ongoing leadership and overall management.

General Motors' disposal of its Delphi Automotive Systems

Conversely, in divestitures, one organization either sells a

business. When it decided to spin off the business, GM was aware

business unit or separates a business unit into a subsidiary to

of the challenges posed by the spin-off and was unsparing of effort

create a viable stand-alone entity and executes an exit strategy

in laying the necessary groundwork for the spin-off (see the GM

in respect of the subsidiary, e.g., by selling the shares in that

case study 13 below).

subsidiary. A well-planned and well-organized divestiture program

32

ABeam Research & Linklaters

Corporate Restructuring

Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi


In May 1999, General Motors spun off its Delphi Automotive

Figure 3.8 GM: Organizing the Separation Project

Systems business, the world's largest automotive supplier, as an

GM
President's
Council

independent company. This is one of the largest divestitures in


history. Prior to the spin-off, Delphi had been a wholly-owned

GM
Oversight
Committee

Delphi
Strategy
Board

subsidiary of GM. In August 1998, the GM Board of Directors


approved a plan to create a fully independent Delphi through a
two-stage spin-off during 1999.

Separation
Execution
Team

As discussed in section 2.7, the first step in a two-stage spin-off

Regular Updates

is a minority carve-out (generally accompanied by an IPO). In

Delphi
Stand-Alone
Team

February 1999, GM sold 100 million shares of Delphi in an IPO,


representing 17.7% of Delphi's total outstanding stock. After

Information
Sharing

Program
Management
Office
Regular Updates

17
Task
Teams

Information
Sharing

IPO
Team

Source:General Motors

the first phase, GM continued to hold the remaining 465 million


shares of Delphi. The second stage is a spin-off. In April 1999,

led by senior executives. These Task Teams each worked on

the GM Board of Directors approved the complete separation of

discrete areas of the project, including: information technology;

Delphi from GM by means of a tax-free spin-off. In May 1999,

technology; shared services; purchasing; supply; facilities and

GM announced a distribution ratio and distributed approximately

environmental; executive management and compensation;

452.6 million shares to GM shareholders by way of a dividend.

salaried personnel; labor relations; internal controls;

The remaining 12.4 million shares were contributed to a Voluntary

international; legal; audited financials; treasury; tax; aftermarket

Employee Beneficiary Association (VEBA) trust to fund benefits

sales; and communications.

for retirees. After the second stage, Delphi became a fully

GM was aware of the IT challenges posed by the separation.

independent company.

The IT Task Team addressed the issues, including dividing the

The IPO and subsequent spin-off was the culmination of a long

IT infrastructure, software and operating system licenses and

process to implement a successful divestiture. Prior to the spin-off,

service agreements.

GM made thorough preparations for the divestiture. In May 1998,

The Task Teams involved both Delphi and GM staff. They needed

a kickoff meeting was held for the separation project. The kickoff

to resolve differences between parent and subsidiary concerning

meeting was opened by the speech on the goal and rationale of the

business plans and the financial terms of separation. They also

project by John F. Smith, Jr., GM Chairman, CEO and President.

needed to negotiate the separation agreements that balanced the

J.T. Battenberg III, Delphi President and GM Executive Vice

interests of the parent and subsidiary and maximized shareholder

President, also made a speech. Early and visible commitment

value. GM understood the necessity for an effective dispute

of senior executives communicated the sense of urgency for

resolution process. Team leaders took the initial responsibility to

successfully achieving the separation. An aggressive timeline was

resolve their disputes. Unresolved disputes were elevated to the

established to complete the project within seven months.

SET and then to the Oversight Committee for final resolution.

GM developed a project structure that provided clear control and

GM also understood that communication and people issues

accountability (Figure 3.8). Under the GM Oversight Committee,

were critical. Massive change as a result of the separation would

the Separation Execution Team (SET) was organized. The SET

create anxiety for all employees. GM prepared a structured

assumed a central role in mobilizing the project. The Program

communication plan to deal with concerns of all stakeholders.

Management Office (PMO) was established to support the SET's

GM's case illustrates the benefits to both the parent and the

project management work. GM hired consultants of solid PMO

subsidiary of following a well-planned and well-organized process

experience in separation projects. To address a wide range of

to prepare for a divestiture.

issues within a short timeline, 17 Task Teams were formed, each


33

ABeam Research & Linklaters

3.6

Summary

Our findings revealed that many companies rated planning growth


strategies prior to restructuring as very important, but assessed
their own performance as less satisfactory. To achieve valuebuilding growth, companies must develop and maintain balanced
business portfolios. The key challenge is to nurture growth
options while divesting underperforming or non-core businesses
proactively. Success in proactive divestitures is more likely when
companies use deliberately interim solutions to an eventual exit
and lay the groundwork for creating a stand-alone entity.

34

Corporate Restructuring

ABeam Research & Linklaters

Corporate Restructuring

Glossary
In the Japanese context, corporate restructuring usually means downsizing by reducing the number of employees and/or contraction of
assets. In this paper, we use the term corporate restructuring in a broader sense to refer to the restructuring of business portfolios through
mergers, acquisitions and divestitures. We set out below a list of some of the terms used in this paper. Where these appear for the first time
in the paper, the terms have been highlighted in bold text.

asset acquisition
business rebuilding
Code
corporate restructuring
corporate split
demerger
divestiture
equity acquisition
equity carve-out
equity participation
financial restructuring
in-house company
In-In deal
In-Out deal
inter-group
intra-group
IPO
leveraged buyout or LBO
M&A transactions or M&A
majority carve-out
management buyout or
MBO
merger
minority carve-out
Out-In deal
private placement
sell-off
share exchange
share transfer
spin-in
spin-off
split-off
split-up
value-building growth

a purchase of assets (including purchases of a collection of assets or a business as a going concern),


usually for cash
the second stage of the three stages involved in a typical corporate restructuring process which usually
involves companies attempting to improve profitability of core businesses
the Commercial Code of Japan
restructuring of business portfolios through M&A transactions
the separation by a company of a business into a new subsidiary or an existing company
a transaction involving the distribution of an equity interest in a business unit of a parent company to the
parent company's existing shareholders, often preceded by a transfer of the business unit concerned into a
new subsidiary
a disposal of assets (including an equity interest in a company) to a third party outside the group of the
selling company whether by sale or other means, e.g. an equity carve-out, IPO, etc.
a purchase of more than 50% of the voting share capital in a company
the sale of a minority or majority of the shares in a wholly-owned or majority-owned subsidiary by its
parent to investors
a purchase of 50% or less of the voting share capital in a company
the first stage of the three stages involved in a typical corporate restructuring process which usually
involves companies taking short-term measures to stabilize their financial situation
a system of internal organization designed to mimic the effect of business units being separated into
different legal entities, intended to increase management efficiently through swift decision-making and
clearly defined responsibility and authority, sometimes knows as an internal divisional company
an M&A transaction between Japanese companies
an M&A transaction involving a Japanese company acquiring or disposing of a non-Japanese company
involving companies from two different groups
involving companies belonging to the same group
Initial Public Offering of shares in a company to the public or to professional investors combined with a
listing of the company concerned on a stock exchange
a variation on an MBO including the acquisition of a target company or business with a large element of
debt financing
mergers, acquisitions and divestitures
a form of equity carve-out (see above)
a transaction in which a management team forms a new company which, with the assistance of outside
financiers, purchases a target company or business; the financial backing is usually a combination of
equity provided by private equity investors and management and debt provided by lending banks
two companies joining, generally accompanied by the liquidation or dissolution of one company and the
issue of shares in the surviving company to the shareholders of the disappearing company
a form of equity carve-out (see above)
an M&A transaction involving a non-Japanese company acquiring or disposing of a Japanese company
an offering of shares or other investments to a group of professional investors, often institutional investors
a sale of a business or subsidiary of a parent company to a company outside its group
a transaction in which an acquiring company issues new shares and exchanges them for the shares of
the firm being acquired (this procedure enables companies to make other companies wholly-owned
subsidiaries)
a transaction in which an existing company incorporates a new company, which issues new shares and
exchanges them for the shares of the existing company (this procedure was introduced to facilitate the
creation of holding companies)
making a non-wholly-owned subsidiary into a wholly-owned subsidiary by the acquisition by the parent
company of the shares in the subsidiary which are held by minority shareholders
demerger (see above)
a variant of a spin-off in which a parent company distributes its shares in a subsidiary to its shareholders
in exchange for the shareholders' shares in the parent company
a form of split-off in which a parent company is broken up into two or more independent companies
the third stage of the three stages involved in a typical corporate restructuring process which usually
involves companies focusing on delivering new products and developing new markets
35

ABeam Research & Linklaters

Corporate Restructuring

Authors
Kimiaki Kimura
ABeam Consulting
Director, ABeam Research
Direct Telephone: +81-3-4288-5840
E-mail: kikimura@abeam.com
Kimiaki Kimura leads ABeam Research, ABeam's thought leadership group. ABeam Research, founded in 2002, conducts original
research and develops unique points of views on business issues facing corporate leaders today.
Casper Lawson
Partner
Linklaters
Direct Telephone: +81-3+3568+3837
E-mail: casper.lawson@linklaters.com
Matthew Bland
Associate
Linklaters
E-mail: matthew.bland@linklaters.com

About ABeam Consulting


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