Corporate Banking

Assignment

By: Nalen Vats & Jaspreet Singh Walia

To: Mrs. Charu Pathak (Faculty)

Q.1 Discuss various types of divestitures with real case examples.

Ans.1 Divestiture refers to the sales of a segment of a company’s business, business

unit, product line or even an individual product. These are partial or full disposal of an
asset or investment or segment of a company, for cash or for securities to an outside
party. Divestitures involve some kind of contraction. Generally, this kind of a decision to
divest a business originate once it becomes evident that the unit in question is no longer
compatible with the strategic direction of the parent company.
A partial or full disposal of a business entity through exchange, closure, sale or
bankruptcy is termed as divestiture.

Types of Divestitures

1. Spin Offs- This type of demerger involves division of company into wholly
owned subsidiary of parent company by distribution of all its shares of
subsidiary of parent company by Pro- Rata basis. Thus, both the companies
exist and carry on their respective businesses.

For Example Shares of Tata Communications tumbled in today’s trade after its
land bank was demerged into a separate company

On August 8, the company said the Ministry of Corporate Affairs

(MCA) approved the Hemisphere Properties India (HPIL)
demerger scheme on August 5 and filed the order with the
Registrar of Companies on September 17.
As per the demerger scheme, Panatone Finvest, which is a special purpose vehicle
under the Tata group of companies, would transfer its shares in HPIL.

Tata Communications Ltd is currently trading at Rs273 down by Rs153.75 or 36.03%

from its previous closing of Rs426.75 on the BSE.

2. Splits- This refers to splitting the corporate entity into two or more parts by
removing non-core business from the main stream business.

In a split-off, shareholders in the parent company are offered shares in a subsidiary, but the catch is
they have to choose between holding shares of the subsidiary or the parent company. A
shareholder has two choices: (a) continue holding shares in the parent company or (b) exchange
some or all of the shares held in the parent company for shares in the subsidiary. Because
shareholders in the parent company can choose whether or not to participate in the split-off,
distribution of the subsidiary shares is not pro rata as it is in the case of a spin-off.

Split-up
The distributing corporation contributes all of its assets to two or
more controlled corporations. This is done in return for stock of
the controlled corporation. The stock in the controlled corporation is then
distributed to shareholders in a single liquidation event of
the distributing corporation.
In November 2009, Bristol-Myers Squibb announced the split-off of its holdings in
Mead Johnson in order to deliver additional value to its shareholders in a tax-
advantaged manner. For each $1.00 of BMY common stock accepted in the exchange
offer, the tendering shareholder would receive $1.11 of MJN stock, subject to an
upper limit on the exchange ratio of 0.6027 MJN shares per share of BMY. Bristol-
Myers owned 170 million Mead Johnson shares and accepted just over 269 million of
its shares in exchange, so the exchange ratio was 0.6313 (i.e., one share of BMY was
exchanged for 0.6313 shares of MJN).to an upper limit on the exchange ratio of
0.6027 MJN shares per share of BMY. Bristol-Myers owned 170 million Mead
Johnson shares and accepted just over 269 million of its shares in exchange, so the
exchange ratio was 0.6313 (i.e., one share of BMY was exchanged for 0.6313 shares
of MJN).

Examples of Splits

A. Split- Ups: When a firm splits into 2 or more entities - usually

accomplished with carve-outs and spin-offs of individual parts, it is said to
have split-up. The result of a split-up is that the parent company ceases to
exist. E.g. In September 1995, AT&T spilt into 3 publicly traded companies
and the 4th business was sold.

B. Split- Offs: e.g., The Reliance Industries Group has now split-off into
Reliance Industries Limited, Reliance Infocomm, Reliance Energy, etc.
3. Equity Carve-Outs- This is similar to spin-offs, except that some part of
shareholding of this subsidiary company is offered to public and parent
company has control over the subsidiary

It is the IPO of some portion / some percentage of the common stock of

the wholly owned subsidiary of the Parent Company. It is sometimes
known as .split-off. IPO. It is one method of equity financing when the
assets of the parent company and the subsidiary are separated. It initiates
the public trading of the Subsidiary.s shares and is not reversible as it is in
case of redeemable preference shares. E.g. In 1999, General Motors did a
carve-out and spin-off of Delphi - Delphi had many customers though GM
remained protected.

4. Disinvestment- Disinvestment, sometimes referred to as divestment,

refers to the use of a concerted economic boycott, with specific emphasis
on liquidating stock, to pressure a government, industry, or company
towards a change in policy, or in the case of govennments, even regime
change. The term was first used in the 1980s, most commonly in the United
States, to refer to the use of a concerted economic boycott

designed to pressure the government of South Africa into abolishing its

policy of apartheid.
Q.2 Write about any one Merger/ Acquisition case study other than
given in notes highlighting its reasons and its impact on the
concerned corporates.
Ans.2 The best example regarding this can be the merger of the Shoe
Manufacturing Companies Adidas and Reebok. Which happened or started
from 3rd August 2005.

Reasons for the Merger

1. Defeating Nike
2. Integrated Research & Development
3. Sharing Technology
4. Fulfillment of Individual Goals
5. Expand Business into Global Business
6. Cost Saving

Adidas and Reebok claimed that the merger was decided upon because of
the realization that their individual (company) goals would be best
accomplished by joining instead of competing. Nike International Inc. (Nike)
was the common competitor for both Reebok and Adidas.

Source: icmrindia, NAFSMA

Findings from the Merger

 1. Adidas acquired Reebok in a friendly merger
2. The merger value is nearly US $ 3.8 billion
3. Adidas will buy all the stocks of Reebok Internationally
4. The main theme of the merger was to withstand the
competition of Nike in the United States and the Global
Markets.

Impact on the Concerned Corporates

The company's revenue in the year 2008 was practically US $ 15. 7 billion and the employee
strength had risen to around 40000 by the end of 2008. 

The merger process was completed in the January month of 2006. The overall net value of the
merger entity was almost US $ 12 billion. The show prices of both companies have increased
because the merger process began till the conclusion of the merger. Adidas took over-all the
companies of Reebok which can be granted by Reebok and even the shares from the open market.
Adidas paid US $ 59 for each and every show of Reebok. On your day of decision of the merger, the
Adidas stock in the Frankfurt stock exchange has increased by 7% which is from 147 on the next of
August, 2005 to 158 on the 3rd of August, 2005. The Reebok stock in the New York Stock Exchange
has increased by almost 30% about the same day. The show value increased from US $ 44 to US $
57 from 2nd of August 2005 to 3rd of August 2005 respectively. The main gain is the fact Adidas
group will have no nearest competitor apart from Nike and therefore there will be reasonable
chance to concentrate on the introduction of the business and improvement of the functional and
managerial procedures.