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17 Cards in this Set
- Front
- Back
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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 |
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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 |
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Split up |
Original firm disappears; old shareholders get pro rata distribution of each subsidiary's shares (ultimate spin-off) Can be taxable to parent |
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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) |
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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 |
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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 |
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Subsidiary |
A company whose voting stock is more than 50% controlled by another company (the parent company) |
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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) |
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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 |
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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 |
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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 |
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Risky debt |
Firm value less value of the call option
Value of riskless debt less value of the put option |
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"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) |
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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 |
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LBO's |
Shareholders of a public corp are bought out at a high premium; going private transaction |
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When are multiples not relevant? |
When trying to find max price for a target |
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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 |
