Divestitures
Chapter 2 cont....
IV. Divestitures: The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. E.g. Volvo AB sold passenger business to Ford for $6.5B.
There are four types of Divestiture initiatives; namely:
1. Spin Offs: A company owns or creates a subsidiary
whose shares are distributed on a pro rata basis to the shareholders
of the parent company where the Parent usually retains some
ownership of approximately 10 to 20%. There are two approaches
to spin offs.
The first approach deals with disinvesting the corporation in terms of keeping equitable shareholding pattern for the newly formed companies. In this case, the company distributes, on a pro-rata basis, all shares that it owns in its subsidiaries, to its shareholders, thereby creating two separate corporations with the same proportional equity in place of the one corporation that existed previously. E.g. Hilton spin-off Park Place Entertainment Corp (casino business) . 1 share for 1 share.
The second approach resorts to floating a new entity, with the selling company (i.e. the company which is disinvesting) participating in its equity and later selling off the assets or division proposed to be spun . off to the new company. E.g. Kimberly Clark spin-off Midwest Express Airlines
2. Splits: As the term denotes, Splits refer to splitting the corporate entity into two or more parts to achieve its strategic objectives such as enhanced profitability by removing non . core businesses from the mainstream businesses, etc. There are two types of Splits; namely:
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: In this case, some of the shareholders of the parent company receive a subsidiary's shares on condition that they return the shares they hold of the parent company. Family owned businesses with complex cross holdings in all subsidiaries use this approach to separate the interest of different family streams. e.g., The Reliance Industries Group has now split-off into Reliance Industries Limited, Reliance Infocomm, Reliance Energy, etc.
3. Equity Carve-outs: 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 a 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.
Motives behind Divestitures
1. Dismantling conglomerates
2. Abandoning core business
3. Changing strategies
4. Adding Value by Selling into a better fit
5. Large Additional Investment required
6. Harvest past successes
7. Discard unwanted business from prior acquisitions
8. Finance prior acquisitions done before LBO
9. Ward off takeover
10. Meeting Government requirements
Benefits of Divestitures
i. Shedding Excess Flab
i.i Effective Market Regulation
ii. Financial Support
Issues in Divestitures
i. Market Reactions
ii. Government Interventions
Some Corporate Examples:
AT&T sold Global Network to IBM, Hoechst AG sold its Paint
Division to DuPont, etc.
