Change management in

multinational corporations

Lecture 12
Defining divestitures
 Selling assets, divisions, subsidiaries
to another corporation or combination
of corporations or individuals
Basic divestitures

Company A without Subsidiary B

Subsidiary B

Company C
Basic divestitures

Company A w/o subsidiary B

Cash, securities or assets as

consideration

Old Sub B

Company C
Features of divestitures
 Selling corporation typically receives
consideration for the assets sold
 cash
 securities
 other assets
 Divestitures are typically taxable
events for selling corporation (new
basis for purchaser)
Spin offs
 Typically parent corporation
distributes on pro rata basis, all the
shares it owns in subsidiary to its own
shareholders.
 No money generally changes hands
 Non taxable event
 as long as it jumps through substantial
hoops
Spin offs

Company A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.
Spin offs

Company A after spinoff

New company B
Shareholders
receive
Shares of
company B

Old shareholders still own shares of company A, which now only represent ownership of
A without B.
Equity carve outs
 Also called partial IPO
 Parent company sells a percentage of
the equity of a subsidiary to the
public stock market
 Receives cash for the percentage sold
 Can sell any percentage, often just
less than 20%
 Equity carve outs

Company A without subsidieary B

Subsidiary B

Stock Market

Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.
 Equity carve outs

Company A without subsidieary B

Portion of
Sub B equity X % of sub B equity sold
Not sold To market for cash
In IPO

X % of
Company
B shares

Shareholders now own 100% of Company A (without B) Stock Market

And (1-X)% of Company B implicitly
Through their company A shares
Motivations for transactions
 Market for corporate control
 Asset are more valuable to alternative
management team

 Unlocking hidden value

 Stock market problem or management problem?

 Improving management incentives

Moving assets to more highly
valued user
 Division no longer has a “strategic fit”
 Returning to the core business
(undiversifying)
 Buyers might simply be willing to pay too
much!
 Spin off, carve out, may set up a
subsequent control transaction
 Or the threat may improve incentives
Focus management
 Part of undiversification
 Easier to run, more able to focus efforts
 Superior performance measurement
 Because you can use direct equity for
compensation
 By the stock market
 Reduction in bureaucracy/Decision
making authority
 Internal capital markets/external cap markets
Unlocking hidden value
 Creation of pure play
 Stock market issue, spin off/carve
out/tracking stock
 Market can’t value tobacco/food, steel/oil
 Makes a control play for sub easier later
 Sell high!
Stock price reaction to sell off
 Statistically positive, but small
 Pre-sell off performance is
contradictory
 Good performance, may be leakage
 Poor performance, may be reason for
restructuring
 Post-sell off performance of parent
 Contradictory
Defensive divestitures
 Company is worried about being taken
over
 sells “crown jewels” so they’re not attractive
anymore
 does a leveraged recap and sells the dogs
 More generally, divestitures follow
leveraged acquisitions
 pay down debt and restructure company to
be most valuable going-forward
Divestiture vs. other
restructuring
 In divestiture is that buyer pays cash
(usually) for the whole sub.
 Depends on price. If the price (after tax)
is better than spin off results, then sell.
(May depend on strategic interests).
 In divestiture, parent no longer controls.
 In divestiture, parent stuck with liabilities
buyer doesn’t want.
 Divestitures move with the M&A market
Bad bidders become good
targets?

 271 large acquisitions completed 1971-

1982
 44% divested by 1982
 Diversification acquisitions four times more
likely to be divested