9.

3 unit 3
Corporate Restructuring and Strategic
Alliances
Strategic alliances are agreements between two or more independent
companies to cooperate in the manufacturing, development, or sale of
products and services or other business objectives.

For example, in a strategic alliance, Company A and Company B combine

their respective resources, capabilities, and core competencies to generate
mutual interests in designing, manufacturing, or distributing of goods or
services.

Spin Offs
A corporate spin-off is an operational strategy used by a company to create
a new business subsidiary from its parent company. A spin-off occurs when
a parent corporation separates part of its business into a second publicly-
traded entity and distributes shares of the new entity to its current
shareholders. The new entity takes assets, employees, or existing product
lines and technologies from the parent in exchange for a pre-determined
amount of cash. The spin entity may take on debt to provide a distribution
to the parent in exchange for those assets or loss of cash flow.

Causes of Spin Offs

• A spin-off may be a method for the parent to reduce agency
costs and create tax shields or to enter a new industry while retaining
a close relationship with the spun-off company. It is a way of
reorganizing a company’s administrative structure in order to
improve its profitability. When a company plans to consolidate or
streamline its workflow, it can spin off a less productive division to
form a new independent company. In other words, a company
creates a new business entity out of its existing divisions, subsidiaries,
or the sub-units.
 • The new individual company is expected to be more profitable and
worth more alone than it would be as a part of the larger business
entity.
• When a spin-off occurs, the shareholders of the parent corporation
are not required to surrender any of their parent corporation stock in
exchange for the subsidiary’s stock.

Equity Curve Outs

Through the process of an Equity Carve Out a company tactically separates
a subsidiary from its parent as a standalone company. The new
organization is complete with its own board of directors and financial
statements. The parent company usually retains its controlling interest in
the new company. It also offers strategic support and resources to help the
new business succeed.

The carve-out is not about selling the business unit outright but, instead, is
selling a portion of the equity stake of that business. This helps the parent
organization to retain its hold over the subsidiary by keeping the majority
equity for itself. The Equity Carve Out allows a company to strategically
diversify into some other businesses which may not be its core operation.

Causes of Equity Curve Outs

• This strategy may be used for a variety of reasons and may be
preferred to total divestment. It might be such that a business unit is
deeply integrated, thus making it hard for the company to sell the
unit off completely while keeping it solvent. Therefore, those looking
at investing in the Equity carve-out are bound to consider as to what
might happen if the parent company completely cuts its ties with the
subsidiary.
• Since full divestment of a company might be a long drawn affair and
take several years, the equity carve-out allows the company to
receive cash for the partial shares it sells now. The Equity Carve-out is
adopted when the company does not expect to find a single buyer
for the entire business or it wants to have some control over the new
business unit.

Stock Splits
Publicly-traded companies all have a given number of outstanding
shares of stock in their company that have been purchased by and issued
to investors. A stock split is a decision by the company to increase the
number of outstanding shares by a specificied multiple.

When a company decides to split its stock, it determines the ratio for the
split. There are a variety of combination ratios open to the company.
However, the most common are 2-for-1, 3-for-1, and 3-for-2 splits.

To understand the concept better, let’s look at an example:

Company A has decided to split their stock and has settled on the most
common split ratio: 2-for-1. In this example, shareholders who’ve already
purchased and been issued shares of Company A’s stock would be given
another share for every stock they already own. In such a scenario, let’s
assume that Company A has 30 million outstanding shares. After the 2-for-
1 stock split, they’ll have 60 million. However, this also means that the value
of each share decreases by 50%.

Stock splits, as our example shows, increase Company A’s total number of
shares outstanding, but make two shares the same value as one share
would have been before the split. Company A’s market capitalization isn’t
affected by this because the total market value of all outstanding shares
hasn’t changed.

Causes of Stock Splits

There are two that are most common causes for stock splits

• The first has to do with perceived company liquidity. With each

share’s price dropping a certain percentage – depending on the ratio
that the company decides to use – investors tend to see the
company’s stock as more affordable, and therefore may be more
likely to buy shares. The lower the share price, the less risky the stock
seems.
• A stock split makes the stock more affordable for more investors and
thus can be used to draw in new investors who may have been
reluctant or simply unable to purchase the stock at its higher, pre-
split price.
 • The move is a useful strategy when a company’s stock price rises to a
level that prices many investors out, or when the price has risen
significantly higher than its competitors’ stock.

Joint Venture
A joint venture is established when the parent companies establish a
new child company. For example, Company A and Company B (parent
companies) can form a joint venture by creating Company C (child
company).

In addition, if Company A and Company B each own 50% of the child

company, it is defined as a 50-50 Joint Venture. If Company A owns 70%
and Company B owns 30%, the joint venture is classified as a Majority-
owned Venture.

Share repurchase
A share repurchase refers to when the management of a public
company decides to buy back company shares that were previously sold to
the public. There are several reasons why a company may decide to
repurchase its shares. For instance, a company may choose to repurchase
shares to send a market signal that its stock price is likely to increase, to
inflate financial metrics denominated by the number of shares outstanding
(e.g., earnings per share or EPS), or to attempt to halt a declining stock
price, to name a few.

Impact of a Share Repurchase

When a company buys back shares, the total number of shares outstanding
diminishes. It paves the way for a few different phenomena.

• First, many technical analysis metrics such as earnings per share (EPS)
or cash flow per share (CFPS) will increase due to a decrease in the
denominator used to produce the figures. Thus, investors must be
wary of the situation, as EPS and CFPS will become artificially inflated
– meaning that the increase cannot be attributed to economic value
creation activities such as boosting earnings or cutting costs.
• Second, following the concept of supply and demand, we can predict
an increase in the stock price. Assuming that the demand for the
stock remains constant in the face of a reduction in supply, we can
project that the price of the stock will increase. Once again, investors
must be wary of the phenomenon as it may not result from legitimate
improvements in the business’ financial health.