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11. Chapter. Corporate Restructuring and Divestitures. Corporate Restructuring Strategies. With constantly changing competitive environments, firms must consistently adjust Managers have many options to change firm structure without taking part in a merger or acquisition

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Corporate Restructuring and Divestitures

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Corporate Restructuring

and Divestitures

corporate restructuring strategies
Corporate Restructuring Strategies
  • With constantly changing competitive environments, firms must consistently adjust
  • Managers have many options to change firm structure without taking part in a merger or acquisition
  • Corporate restructuring should occur within the framework of the firm’s overall strategy
  • No one-size-fits-all approach to corporate decision making
types of restructuring5
Types of Restructuring
  • Methods are sometimes used in tandem or employed sequentially
    • Equity carve-outs can be first stage of a broader divestiture, preceding:
      • Sale of remaining interest of subsidiary to another firm
      • 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
restructuring example
Restructuring Example:
  • AT&T has used almost every restructuring method in last 20 years
  • 1984 antitrust break up: split-up using spinoffs
    • Shareholders receive 1 share of each “Baby Bell” for ever 10 AT&T shares
  • AT&T Capital
    • 1993 $107.5 million public offering of 14%
    • 1996 $2.2 billion asset sale to an investor group


restructuring example7
Restructuring Example:
  • 1995-6 Split-up
    • Lucent: $3 billion carve-out in 18% IPO, followed by spinoff (.324 shares Lucent for each AT&T)
    • NCR: spinoff (0.0625 NCR shares per AT&T)
    • Universal Card: asset sale for $3.5 billion to Citicorp




Asset sale

Universal Card

restructuring example8
Restructuring Example:
  • AT&T Wireless
    • Tracking stock representing 15.6% interest was sold in IPO for $10.6 billion
    • Later, exchange offer gave shareholders choice of AT&T or AT&T Wireless stock
    • Last, spinoff executed in which .32 wireless shares were distributed to AT&T holders
  • AT&T Broadband
    • 10/00 – AT&T announces it will divest unit
    • 7/01 – Comcast makes unsolicited bid, forcing AT&T into an auction
    • 12/01 – Comcast declared auction winner
more restructuring examples
More Restructuring Examples
  • Auto Parts Industry
    • GM divested Delphi Automotive Systems (1999) – 17.3% equity carve-out offered in IPO, followed by a spinoff
    • Ford spun off Visteon via a stock dividend
  • Phillip Morris
    • Restructuring to reinforce strategy of focus on food and tobacco
    • Equity carve-out of 16% of Kraft ($8.7 billion) helped pay down debt from Nabisco acquisition
    • Asset sale of Miller Brewing to South African Breweries for $5.6 billion
restructuring motives
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 in due to market changes
  • Divestiture reasons: learning, reversing mistakes, changing strategies (Weston, 1989)
  • Firms restructure to remain competitive and to respond to change forces in the economy
divestitures and wealth creation
Divestitures and Wealth Creation
  • Modigliani, Miller, and Irrelevance
    • If no transaction or information costs, corporate organization is irrelevant
    • Managers cannot improve value by chopping firm into pieces
    • Theory frames analysis of information and transactions costs and other factors
restructuring and transaction costs petrochemical industry
Restructuring and Transaction Costs: Petrochemical Industry
  • Study of transaction cost uncertainty on vertical integration (Fan, 1996, 2000)
  • Impact of uncertain oil prices:
    • Before 1973 OPEC oil embargo, 13% of sample firms owned oil and gas assets
    • After embargo, fraction increased to over 50%
    • By 1992, fraction reverted back to 26%
    • Consolidation due to energy contracts being difficult to write and to enforce (higher transaction costs)
  • Example: Dupont (chemicals) bought Conoco (oil) in 1981; divested in carve-out and exchange offer in 1998-9
restructuring and change forces the natural gas industry
Restructuring and Change Forces: The Natural Gas Industry
  • Change forces transformed industry over course of 100 years
  • Early 1900s – production close to consumers
  • 1920s – gas discoveries in southwest required construction of pipelines – vertical integration between production and transmission
  • 1930s – price regulation, and legislation requiring separation of production and transmission– caused decline in vertical integration
  • Current landscape – changing regulation has encouraged mergers and divestitures