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17 Cards in this Set

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Sell Off

Type of divestiture




New funds are raised by the parent as it relinquishes control of its subsidiary (parent is taxed)




Value created for seller if:


sale price less taxes > PV of continued ops







Reasons for Sell Offs

Unit is worth more to others




To sell undervalued investments at full price




Unit does not contribute to L/T plans

Split up

Original firm disappears; old shareholders get pro rata distribution of each subsidiary's shares (ultimate spin-off)




Can be taxable to parent



Split off

Type of share repurchase (buyback) where shares of a unit/sub is given to a minority shareholder in exchange for parent's shares held by that minority investor




Private deal




Form of Greenmail (anti-takeover defense where target pays a premium for its own stock at inflated prices)

Spin off

A type of divestiture where the creation of an independent company through the sale or distribution of new shares of an existing business of a parent company




Created by distributing 100% of ownership interest in that business unit as a stock dividend to existing shareholders




Taxable to parent and its shareholders if parent company does not distribute at least 80% of shares




No change in ownership

Reasons for Spin offs

The spun-off companies are expected to be worth more as independent entities than as parts of a larger business




To get rid of less productive or unrelated subsidiary businesses

Subsidiary

A company whose voting stock is more than 50% controlled by another company (the parent company)

When should a company consider selling (divesting) a unit rather than spinning it off?

When:




Another party will pay more than entity is worth to current shareholders on a stand-alone basis




Several bidders are likely to bid for the unit (enhancing chance of capturing a premium)



When should a company consider spinning off a unit rather than selling it off?

If expected value of shares created for new subsidiary is greater than the after-tax proceeds from the divestiture

Equity Carveout

Parent raises new funds and creates shares for a subsidiary (referred to as a "partial IPO")




Parent usually maintains controlling interest in subsidiary (100% equity carveout is called a "divestiture IPO)




No tax liability to the parent




Carveouts usually only IPO 20% or less of sub





Absolute Priority Rule in Liquidation

1. Secured claims


2. Debtor in possession


3. Bankruptcy expenses


4. Wages


5. Contributions to benefit plans


6. Consumer claims


7. Gov't tax claims


8. Unsecured creditors


9. Preferred stockholders


10. Common stockholders

Risky debt

Firm value less value of the call option



Value of riskless debt less value of the put option



"Just say no" defense

Strategy used to discourage hostile takeovers




Board members say no despite huge premiums being offered if they believe they have a better L/T strategy (can be bad for shareholders)





Targeted / Tracked Stock

Separate class of stock created for a business unit; unlike a carveout or spin-off, this unit does NOT become a separate public company (remains wholly owned business unit of parent)




Non taxable event to both firm and its shareholders

LBO's

Shareholders of a public corp are bought out at a high premium; going private transaction

When are multiples not relevant?

When trying to find max price for a target

Reverse Triangular Merger

The formation of a new company that occurs when an acquiring company creates a subsidiary, the subsidiary purchases the target company and the subsidiary is then absorbed by the target company




Simpler than a direct merger