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1. - - - - - - - - Chapter 11- - - - - - - - Restructuring and Divestitures ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1

2. Corporate Restructuring Strategies • General framework of corporate restructuring • Asset management • Acquisitions • Sell-offs or divestitures • Ownership relationships • Spin-offs • Split-up • Equity carve-outs ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2

3. Reorganizing financial claims • Exchange offers • Dual-class recapitalizations • Leveraged recapitalizations • Financial reorganization (bankruptcy) • Liquidation • Other strategies • Joint ventures • ESOPs and MLPs • Going-private transactions • International markets • Share repurchase programs ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3

4. Some basic forces • Need to meet global competition • Align interests between managers and shareholders — agency problem • Move assets to owners who can utilize them more efficiently • Reverse conglomerate merger movement of the 1960s ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4

5. Definitions • Divestiture • Sale of segment of a company to a third party • Sale for cash or securities or some combination thereof • Assets revalued for purpose of future depreciation by the buyer ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5

6. Spin-off • Company distributes on a pro rata basis all shares it owns in a subsidiary to its own shareholders • Two separate public corporations with initially same proportional equity ownership now exist • No money changes hands • Subsidiary's assets are not revalued • Transaction treated as a stock dividend • Transaction is a tax-free exchange ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6

7. Equity carve-outs • Some of subsidiary's shares are offered for sale to general public • Bring infusion of cash to parent firm without loss of control • Often sell up to 20% in IPO, later spin off of remainder of shares • Split-ups • Two or more new companies come into being in place of original company • Usually accomplished by spin-offs ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7

8. Diverse Motives for Divestitures • Dismantling segments of conglomerates which had higher values as independent operations or better fit with other firms • Sale of original business due to changing opportunities or circumstances ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8

9. Change in strategic focus which may reflect realignment with firm's changing environments • Adding value by selling into a better fit • Firm is unable or unwilling to make additional investments to remain in a business • Harvesting past successes to make resources available for developing other opportunities ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9

10. Discarding unwanted businesses from prior acquisitions to value-increasing buyer • Divestiture to finance major acquisitions or LBOs • Divestiture used as a takeover defense by selling off "crown jewel" • Divestiture to obtain government approval of a combination of segments with competing products ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10

11. Corporate sale of divisions or business units to operating managements • Divestiture of unrelated divisions to focus on core businesses • Divestiture of low margin product lines to improve margins and profitability • Divestiture to finance another firm • Divestiture to reverse prior mistakes • Divestiture of businesses after learning more about them ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11

12. Event Returns • Buyers • Returns are not statistically significant • Sellers • Average positive gains of 1 to 2% • Positive gains related to size of sell-off • Positive gains if proceeds paid out to shareholders ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12

13. Kaplan and Weisbach (1992) • Sample of 271 acquisitions between 1971 and 1982 • By 1989, 119 had been divested — median holding period of seven years • Relatedness • 60% of acquisitions in which acquirer and target are unrelated have been divested • Fewer than 20% of highly related acquisitions have been divested ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13

14. Gains and losses on divestitures • 44% of acquirers report loss on sale • 56% report gain or no loss • Comparison of sale price to purchase price of divested unit • Most units sold for more than they cost • Deflated by S&P 500 • Average price of divested units is 90% of purchase price • Sale price averages 143% of target's pretakeover market value • Acquisitions that ultimately prove unsuccessful are considered poor investments by the market when they are made — unfavorable event returns ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14

15. Rationale for Divestitures • Boot (1992) • Divestitures are a commonly observed post-takeover initiative • Target firm's management did not divest earlier because divestitures would represent admissions of earlier unwise decisions ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15

16. Cho and Cohen (1997) • Well performing operating units may partially hide poor performance of other units • When other units begin to underperform industry peers, sale of poorly performing units are triggered ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16

17. Berger and Ofek (1996) • Firms with largest diversification discount or value losses are likely to become takeover targets • Extent of post-takeover bustup sales activity is positively related to the size of diversification discount • Divested divisions in post-takeover bustups are generally purchased and become part of a focused, stand-alone firm ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17

18. Linn and Rozeff (1984) (LR) • Valid reasons for divestitures • Assets are worth more as part of buyer's organization than as part of seller's • Assets are actively interfering with other profitable operations of seller • Gains to divestitures (1-2%) smaller than for spin-offs (3-5%) • May reflect poor performance prior to divestiture (LR rejected this rationale) • May reflect that divestitures are smaller in scale • May reflect managerial incentive factor ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18

19. John and Ofek (1995) • Value gains result from improved management of assets remaining after divestiture • Attributed to increased focus • Decrease in number of reported lines of business • 75% of divested divisions are unrelated to core activities of seller • Supports hypothesis that better fit between buyer and divested divisions accounts for some of value gain ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19