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Corporate Restructuring and Divestitures

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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  1. 11 Chapter Corporate Restructuring and Divestitures

  2. 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

  3. Types of Restructuring

  4. Types of Restructuring

  5. 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

  6. 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 Spinoff

  7. 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 Carve-out, Spinoff Spinoff Asset sale Universal Card

  8. 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

  9. 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

  10. 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

  11. 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

  12. Divestitures and Wealth Creation

  13. 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

  14. 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

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