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Corporate Structure & Deals 1.

Throughout this course we look at how a business is organized as a value driver. A company is a nexus of contracts, and management understands that the scope of these contracts is important. Why would two separate divisions be optimally part of the same company?

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Corporate Structure & Deals 1.

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  1. Throughout this course we look at how a business is organized as a value driver. A company is a nexus of contracts, and management understands that the scope of these contracts is important. Why would two separate divisions be optimally part of the same company? When we look at merger justifications, the usual suspects are: Synergies. Economies of Scale. Strategic Positioning (Relative Bargaining strength a la Wal Mart). Corporate Structure & Deals 1.

  2. Of course, most mergers end up being ill-conceived, and the imagined synergies never materialize. Instead, problems in mixing corporate cultures and key value drivers result in value destruction. Examples: Gillette and Duracell Eli Lilly and PCS AOL and Time-Warner Whither Synergies

  3. Spin Offs Yesterday’s mergers are often today’s spin-offs. There is a certain faddishness or follow-the-leader mentality in organizational structure and deals. The 1960’s saw a conglomerate merger wave, while the 90’s saw an emphasis on corporate focus.

  4. Internal vs. External Markets When two activities are within the same corporation, transactions between them are not dictated by a market. (The corporation is an “anti-market.”) Often the justification for spin-offs is to achieve the benefits of a market (for example the stock market as a motivational tool for management).

  5. Anslinger, Klepper & Subramaniam Three ways of Breaking Up: • Tracking Stocks • Dividend to parent shareholders; or • IPO • Equity Carve-Outs • IPO in the subsidiary, Parent retains majority stake. • Spin-Offs • Entire Subsidiary divested as dividend to parent shareholders.

  6. AKS 2. Gains from splitting up: • Increased Analyst Coverage • New investor base • Improved Incentives for subsidiary management • Improved Corporate Governance / Strategic Flexibility.

  7. Less Common Gains: • Tax Advantages (Real Estate ownership set out as a REIT). • Protecting subset of assets from litigation. • Expropriating wealth from lenders by disproportionate debt burdens (mitigated by covenants, e.g., puttable bonds).

  8. AKS 3. Concerns: Spin-off is blood in the water. Sub might be taken over; Forced to separate entirely. Facts: relatively stable structures. Recent episodes—tap into a market bubble.

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