Corporate Re-structuring

1. Mergers & Acquisitions (M&As)
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Mergers & Acquisitions (M&As)
Modul IX

2. I N Wisnu Wardhana-M&As-IMTelkom
Modul IX
Corporate Restructuring

3. Corporate Restructuring
Corporate Re-structuring
Split-Offs
equity carve-out
Spin-Offs
Divestiture
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4. Corporate Restructuring
Many corporations, particularly large, highly diversified organizations,
are reviewing constantly ways in which they can enhance shareholder
value by changing the composition of their assets, liabilities, equity,
and operations. These activities generally are referred to as
restructuring strategies
Restructuring may embody both growth and exit strategies
Strengthen
itscompetitiveness
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growth exit strategies
itscompetitiveness
Divestiture
Spin-Offs and Split-Ups
Equity Carve-Outs
Split-Offs
Voluntary Liquidations (Bust-Ups)
Tracking, Targeted, and Letter Stocks

5. Commonly Stated Motives for Exiting Businesses:
Increasing Corporate Focus, Managing highly diverse and complex portfolios is both time
consuming and distracting
Underperforming Businesses, Parent firms often exit businesses that consistently fail to meet or
exceed the parent’s hurdle rate requirements
Regulatory Concerns, A firm with substantial market share purchasing a direct competitor may create
concerns about violations of antitrust laws
Lack of Fit, Individual businesses may be undervalued insufficient benefits accrue from synergy to
Restructuring
Corporate Restructuring - Motives
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Lack of Fit, Individual businesses may be undervalued insufficient benefits accrue from synergy to
offset the overhead expenses
Tax Considerations, Restructuring actions may provide tax benefits that cannot be realized without
undertaking a restructuring
Raising Funds or Worth More to Others, Better to fund new initiatives or acquisitions or reduce
leverage through the sale or partial sale of units no longer considered strategic or underperforming
Risk Reduction, A firm may reduce its perceived risk associated with a particular unit by selling a
portion of the business to the public
Discarding Unwanted Businesses from Prior Acquisitions, Acquiring companies often find
themselves with certain assets and operations of the acquired company that do not fit their primary
strategy

6. A divestiture is the sale of a portion of a firm’s assets to an outside party,
generally resulting in a cash infusion to the parent. Such assets may include
a product line, subsidiary, or division.
Divestitures often represent a way of raising cash. A firm may choose to sell an undervalued
or underperforming operation that it determined to be nonstrategic or unrelated to the core
business
Rationales:
Corporate Restructuring – Divestiture
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Rationales:
Corporate Portfolio Reviews
To Sell or Not to Sell (The steps):
o Step 1. Calculating After-Tax Cash Flows (CF)
o Step 2. Estimating the Discount Rate (DR * CF)
o Step 3. Estimating the After-Tax Market Value of the Business (MV ~ {DR * CF})
o Step 4. Estimating the Value of the Business to the Parent (EV = MV – L)
o Step 5. Deciding to Sell:
SV > EV, divest
SV < EV, retain
Timing of the Sale
The Selling Process
Tax and Accounting Considerations for Divestitures

7. Corporate Restructuring – Spin Offs or Split Ups
A spin-off is a transaction in which a parent creates a new legal subsidiary and
distributes shares it owns in the subsidiary to its current shareholders as a stock
dividend.
Rationales:
Taxation, spin-offs provide a means of rewarding shareholders with a
nontaxable dividend
The Unit independent of the parent, new entity will have
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The Unit independent of the parent, new entity will have
independent separately legal from parent to conduct businesses
A greater incentive to improve the unit’s performance if they own stock
in the unit
Example:
Spin Offs PT. Telekomunikasi International Indonesia from its parent PT.
Telekomunikasi Indonesia, Tbk.
Spin Offs Idearc Inc. From its parent Verizon Communications Inc.

8. An equity carve-out exhibit characteristics similar to spin-offs. Both result in the
subsidiary’s stock being traded separately from the parent’s stock.
Similar to divestitures and IPOs in that they provide cash to the parent.
The parent generally retains control of the subsidiary in a carve-out
transaction. Retention of at least 80 percent of the unit
Corporate Restructuring – Equity Carve Outs
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Rationales:
o Opportunity to raise funds for reinvestment in the subsidiary, paying off debt, or
paying a dividend to the parent firm
o Frequently is a prelude to a divestiture
Basic form:
o IPOs, is the first offering to the public of common stock of a formerly privately held
firm
o Subsidiary’s carve – outs, the parent issues a portion of the subsidiary’s stock to the
public

9. A split-off is similar to a spin-off in that a firm’s subsidiary becomes an
independent firm and the parent firm does not generate any new cash.
The split offs involves an offer to exchange parent stock for stock in the parent
firm’s subsidiary, and normally are non-pro-rata stock distributions in contrast to
spin-offs, which generally are pro-rata or proportional distributions of shares.
Rationales:
Corporate Restructuring – Split Offs
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Rationales:
Unlike Divestiture, Split Offs are best suited for disposing of a less than 100
percent investment stake in a subsidiary.
It also reduces the pressure on the spun-off firm’s share price, because
shareholders who exchange their stock are less likely to sell the new stock
Further, it increases the earnings per share of the parent firm by reducing
the number of its shares outstanding, as long as the impact of the reduction in
the number of shares outstanding exceeds the loss of the subsidiary’s earnings

10. A Voluntary Liquidation (Bust-Ups), reflects the judgment that the
sale of individual parts of the firm could realize greater value than the value
created by a continuation of the combined corporation.
Rationales:
This may occur when management views the firm’s growth prospects
as limited. This option generally is pursued only after other restructure
Corporate Restructuring – Liquidations
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as limited. This option generally is pursued only after other restructure
actions have failed to improve the firm’s overall market value.
In general, a merger has the advantage over the voluntary bust-up of
deferring the recognition of a gain by the stockholders of the selling
company until they eventually sell the stock. In liquidation, the selling
shareholders must recognize the gain immediately.
Unused tax credits and losses belonging to either of the merged firms carry
over in a nontaxable merger but are lost in liquidation.
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11. A tracking stock is a class of common stock that links the shareholders’ return to
the operating performance of a particular business segment or unit (i.e., the
targeted business unit).
It represents an ownership interest in the company as a whole
The parent’s board of directors and top management retain control of the
subsidiary, since the subsidiary is still legally a part of the parent.
Dividends paid on the tracking stock rise or fall with the performance of the
Corporate Restructuring – Tracking, Targeted, and Letter Stocks
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Dividends paid on the tracking stock rise or fall with the performance of the
business segment.
For voting purposes, holders of tracking stock with voting rights may vote their
shares on issues related to the parent and not the subsidiary.
Rationales:
It issued to current parent company shareholders as a dividend, used as
payment for an acquisition, or more commonly, issued in a public offering
To enable the financial markets to value the different operations within a
corporation based on their own performance.
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12. Compare
Alternative Strategies
Characteristics Divestitures Equity
Carve-outs
and IPOs
Spin-
Offs
Split-Ups Split-Offs Voluntary
Liquidation
(Bust-Ups)
Tracking
Stocks
Cash infusion to parent Yes Yes No No No No Yes
Change in equity
ownership
Yes Yes No Sometimes1 Yes Yes Sometimes
Parent ceases to exist No No No Yes No Yes No
New legal entity created Sometimes Yes2 Yes Yes No No No
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1) Parent firm shareholders may exchange their shares for one or more of the spin-off’s shares or immediately sell
their shares resulting in a different distribution of ownership.
2) Applies to subsidiary carve-outs only.
3) The proceeds are taxable if returned to shareholders as a dividend or tax deferred if used to repurchase the
parent’s stock.
4) The transaction is generally not taxable if properly structured.
5) Only dividend payments and shareholder gains on the sale of stock are taxable.
New shares issued Sometimes Yes Yes Yes No No Yes
Parent remains in control No Generally No No No No Yes
Taxable to shareholders Yes3 Yes3 No4 No4 No4 Yes No5
Source: chart, from various independent sources

13. Compare - Divestiture, Carve-Out, and Spin-Off
Divestitures
Carve-Outs
Corporation-1
Parent Inc.
Corporation-1
Parent Inc.
Div-A’ Div-B’
Sub-X Sub-Y
Sub-Z
Corporation-1
Parent Inc.
Corp-2 Inc.
Corp-Z Inc.
or
Corp-2 Inc.
Stock Ex.
(Market)
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Spin-Offs
Div-A’ Div-B’
Sub-X Sub-Y Sub-Z
Div-A’ Div-B’
Sub-X Sub-Y
Corporation-1
Parent Inc.
Div-A’
Sub-YSub-X Sub-Y Sub-Z Sub-B
Sub-Z
80%
< 20%
Source: chart, from various independent sources
Before After

14. The reasons for selecting a divestiture, carve-out, or spin-off strategy are inherently
different.
Parent firms that engage in divestitures often are highly diversified in
largely unrelated businesses and have a desire to achieve greater focus
or raise cash (Bergh, Johnson, and Dewitt, 2007).
Parent firms that use carve-out strategies usually operate businesses in
Compare - Divestiture, Carve-Out, and Spin-Off – cont’
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Parent firms that use carve-out strategies usually operate businesses in
somewhat related industries exhibiting some degree of
synergy and desire to raise cash. Consequently, the parent firm may
pursue a carve-out rather than a divestiture or spin-off strategy to retain
perceived synergy (Powers, 2001).
Firms engaging in spin-offs often are highly diversified but less so
than those that are prone to pursue divestiture strategies and have little need to
raise cash (John and Ofek, 1995; Kaplan andWeisbach, 1992).

15. The stage entails selecting the appropriate exit strategy; Divestitures, Carve-outs, and
Spin-offs are the most commonly used restructuring strategy when a parent
corporation is considering partially or entirely exiting a business.
The decision as to which of these three strategies to use is often heavily influenced
by:
The parent firm’s need for cash
The degree of synergy between the business to be divested or spun off
The parent’s other operating units, and the potential selling price of the division
Compare - Divestiture, Carve-Out, and Spin-Off – cont’
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The parent’s other operating units, and the potential selling price of the division
These factors are not independent.
Parent firms needing cash are more likely to divest or engage in an equity
carve-out for operations exhibiting high selling prices relative to their synergy value.
Parent firms not needing cash are more likely to spin off units exhibiting low
selling prices and synergy with the parent.
Parent firms with moderate cash needs are likely to engage in equity carve-
outs when the unit’s selling price is low relative to perceived synergy.

16. Characteristics - Divestiture, Carve-Out, and Spin-Off – cont’
Exit or Restructuring
Strategy Characteristics
Divestitures Usually unrelated to other businesses owned by parent
Operating performance generally worse than the parent’s consolidated performance
Slightly underperform their peers in year before announcement date
Generally sell at a lower price than carve-outs measured by market value to book
assets
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Carve-outs Generally more profitable and faster growing than spun-off or divested businesses
Operating performance often exceeds parent’s
Usually operate in industries characterized by high market to book values
Generally outperform peers in year before announcement date
Spin-offs Generally faster growing and more profitable than divested businesses
Most often operate in industries related to other industries in which the parent
operates
Operating performance worse than parent’s
Slightly underperform peers in year before announcement date
Sources: Ravenscroft and Scherer (1991), Cho and Cohen (1997), Hand and Skantz (1997), Kang and Shivdasani (1997), Powers (2001, 2003), Chen
and Guo (2005), and Bergh et al. (2007).

17. Determinants of Returns to Shareholders
Empirical studies indicate that the alternative restructure and exit strategies generally
provide positive abnormal returns to the shareholders of the company implementing the
strategy.
Why?
Such actions often are undertaken to correct many of the problems associated with highly
diversified firms;
underperforming businesses
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Having invested in underperforming businesses
Having failed to link executive compensation to the
performance of the operations directly under their control
Being too difficult for investors and analysts to evaluate
Alternatively, restructuring strategies involving a divisional or asset sale may create
value simply because the asset is worth more to another investor

18. Determinants of Returns to Shareholders – cont’
Divestitures, create value by increasing the diversified firm’s focus and reducing
the conglomerate discount, it’s transferring assets to those that can use them more
effectively, resolving agency conflicts, and mitigating financial distress.
Return to shareholders:
Increasing Focus, attribute these returns to increased focus and the
ability of management to understand fewer lines of business.
Transferring Assets to Those Who Can Use Them More Efficiently, divestitures
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Transferring Assets to Those Who Can Use Them More Efficiently, divestitures
result in productivity gains by redeploying assets from less productive
sellers to more productive buyers
Resolving Differences between Management and Shareholders (Agency
Conflicts), Conflicts arise when management and shareholders disagree about
major corporate decisions
Mitigating Financial Distress, Firms that divest assets often have lower cash
balances, cash flow, and bond credit ratings than firms
exhibiting similar growth, risk, and profitability characteristics

19. Determinants of Returns to Shareholders – cont’
Spin-Offs, generally are tax free, while any gains on divested assets can be
subject to double taxation. With spin-offs, shareholder value is created by increasing
the focus of the parent by spinning off unrelated units, providing greater
transparency, and transferring wealth from bondholders to shareholders.
Return to shareholders:
Increasing Focus, spin-offs that increase the focus of the parent for those
parents for which the spin-off is not in the same industry
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parents for which the spin-off is not in the same industry
Greater Transparency (Eliminating Information Asymmetries), help to improve
investors’ ability to evaluate the firm’s operating performance that reduced
information asymmetries tend to increase shareholder value
Wealth Transfers,
spin-offs reduce the assets available for liquidation in the event of business
failure
the loss of the cash flow generated by the spin-off may result in less total
parent cash flow to cover interest and principal repayments on the parent’s
current debt

20. Equity Carve-Outs, Value is created by increased parent focus, providing a
source of financing, and resolving differences between the parent firm’s management
and shareholders
Return to shareholders:
Increasing Focus, demonstrates that parents and subsidiaries involved in carve-
outs are frequently in different industries positive announcement date
Determinants of Returns to Shareholders – cont’
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outs are frequently in different industries positive announcement date
returns often are higher for carve-outs of unrelated subsidiaries.
Providing a Source of Financing Equity, carve-outs can help to finance the needs
of the parent or the subsidiary involved in the carve-out. It usually uses to
finance their high-growth subsidiaries.
Resolving Agency Issues, It’s arguing that some managers are less likely to sell
assets because their compensation is based on the size of the firm, equity carve-
outs may be used instead of divestitures to allow the managers to retain control
over the assets involved in the carve-out
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