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Lecture 6

FINE 434 Lecture 6: FINE 434 - Topics in Finance 1 - Winter 2017 Part 6
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Department
Finance
Course Code
FINE 434
Professor
Jiro Kondo

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- Equity carve-outs can be the first stage of a broader divestiture, preceding:
o Sale of remaining interest of subsidiary to shareholders.
o Spinoff of remaining ownership to shareholders.
- Split-ups employ a variety of methods, usually spinoffs.
- Tracking stock may be first step of a spinoff or exchange offer.
Choice between methods should be made with shareholders’ interests in mind; e.g., carve-out
is preferable over spinoff if:
- Subsidiary is undervalued (conglomerate discount).
- Parent wants to keep long-term stake in subsidiary.
- Equity markets are hot.
- Parent company needs cash.
Restructuring motives
Many possible motives for a firm to restructure.
Direct relation between corporate strategy and corporate restructuring.
Corporate focus often cited as restructuring reason, but focused companies also must review
strategic alternatives due to market changes.
Firms restructure to remain competitive, to correct mistakes, and to respond to change.
Restructuring and shareholder value
If there are no transaction or information costs, corporate organisation is irrelevant.
Managers cannot improve value by chopping firm into pieces.
Theory guides analysis of restructuring toward factors such as information and transactions
costs as possible sources of shareholder value creation.
Topic 6: Part 2: Empirical tests of corporate restructuring
Sources of wealth gains
Studies often find the larger the divestiture, the larger the announcement return.
Positive returns to both buyer and sell indicate that asset sales likely represent efficient
redeployment of assets.
Further tests of information vs. efficiency:
- Unsuccessful asset sales lose gains from announcements.

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- Equity carve-outs can be the first stage of a broader divestiture, preceding: o Sale of remaining interest of subsidiary to shareholders. o Spinoff of remaining ownership to shareholders. - Split-ups employ a variety of methods, usually spinoffs. - Tracking stock may be first step of a spinoff or exchange offer. Choice between methods should be made with shareholders’ interests in mind; e.g., carve-out is preferable over spinoff if: - Subsidiary is undervalued (conglomerate discount). - Parent wants to keep long-term stake in subsidiary. - Equity markets are hot. - Parent company needs cash. Restructuring motives Many possible motives for a firm to restructure. Direct relation between corporate strategy and corporate restructuring. Corporate focus often cited as restructuring reason, but focused companies also must review strategic alternatives due to market changes. Firms restructure to remain competitive, to correct mistakes, and to respond to change. Restructuring and shareholder value If there are no transaction or information costs, corporate organisation is irrelevant. Managers cannot improve value by chopping firm into pieces. Theory guides analysis of restructuring toward factors such as information and transactions costs as possible sources of shareholder value creation. Topic 6: Part 2: Empirical tests of corporate restructuring Sources of wealth gains Studies often find the larger the divestiture, the larger the announcement return. Positive returns to both buyer and sell indicate that asset sales likely represent efficient redeployment of assets. Further tests of information vs. efficiency: - Unsuccessful asset sales lose gains from announcements. - Announcement causes negative stock returns to competitors. Corporate focus as source of gains: executives able to monitor and run firm with narrow scope. Studies compare related and unrelated divestitures; usually using SIC codes (imperfect measure as it classifies divestitures of vertically integrated subsidiaries as “unrelated”). Some evidence that divestiture of related subsidiaries (compared to unrelated) had higher returns: this implies that corporate focus can’t explain all gains in divestitures. More generally, studies measuring diversification discounts may have self-selection bias. Topic 7: Part 1: Dittmann et al. (2008) Motivation The authors perform a case study of the German firm Preusaag. In 1997, Preussag’s activities were: - 93% in old economy ind
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