Beruflich Dokumente
Kultur Dokumente
(BOOK ID –B1036)
10. Organization, funding and other methods to implement all of the proceeding
elements
11. Information flow and feedback system for continued repetition of all essential
elements and for adjustment and changes at each stage
a. Spin Off
b. Divestitures
Divestiture is a transaction through which a firm sells a portion of its assets or a division
to another company. It involves selling some of the assets or division for cash or
securities to a third party which is an outsider. These assets may be in the form of
plant, division or product line, subsidiary and so on. The divestiture process is a
form of contraction for the selling company and means of expansion for the
purchasing company. For a business, divestiture is the removal of assets from the
books. Businesses divest by the selling of ownership stakes, the closure of
subsidiaries, the bankruptcy of divisions, and so on. The buyers benefit due to low
acquisition cost of a completely established product line which is easy to combine in his
existing business and increase his profit and market share. The seller can
concentrate after divestiture more on profitable segment and consolidate its business
activities. The motive for divestiture is to generate cash for the expansion of other
product lines, to get rid of poorly performing operation, to streamline the corporate firm
or to restructure the company’s business consistent with its strategic goals.
Divestiture enables the selling firm to have more lean and focused operation. This in
turn, helps the selling company to increase its efficiency and profitability and also help to
create more value for its shareholders.
The general opinion is that divestiture is the outcome of incapability of the parent
company to manage dissimilar assets or assets creating negative synergy. Some
of the reasons for divestitures are mentioned here below:
o To correct the previous investment decision where the company moved into the
operational field having no expertise or experience to run on profitable basis
o To realize the capital gain from the assets acquired at the time when they
were under performing
Reverse Synergy
Poor Performance
i) Computation of decrease in cash flow after tax (for year 1,2,…n) due to sale of division
iv) Computation of present value of obligations related to the liabilities of the division
(assuming liabilities are also transferred with the sale of a division)
Present value lost due to sale of division is less than the sale proceeds obtained from it:
Accept, that is, sell the division
Present value lost due to sale of division is more than the sale proceeds obtained from it:
Reject, that is, keep the division
MLPs emerged during the late 1970s and early 1980s as a means of asset securitization
financing initially among real-estate-based businesses. Typically, several smaller
partnerships were rolled into an MLP, with partners receiving MLP units in exchange
for their partnership interests. The format soon gained favor among upstream oil and
gas exploration and development companies and MLPs were eventually adopted
by a wide range of industries both in the U.S. and in Canada, where the format
is known as the Royalty Trust. Today's MLPs are predominantly active in the energy,
lumber, and real estate industries in the developed countries. MLPs are a type of
limited partnership in which the shares are publicly traded. The limited
partnership interests are divided into units which are traded as shares of common
stock. Shares of ownership are referred to as units. MLPs generally operate in the
natural resource, financial services, and real estate industries. Unlike a corporation, a
master limited partnership is considered to be the aggregate of its partners rather
than a separate entity.
There are two types of partners in this type of partnership. They are called as general
partners and limited partners. The general partner is the party responsible for
managing the business and bears unlimited liability. The general partner is typically
the sponsor corporation or one of its operating subsidiaries. General partner receives
compensation that is linked to the performance of the venture and is responsible
for the operations of the company and, in most cases, is liable for partnership
debt. The limited partner is the person or group (retail investors) that provides the
capital to the MLP and receives periodic income distributions from the MLP's cash
flow. The limited partners have no day-to-day management role in the partnership.
It has the advantage of limited liability for the limited partners. The transferability
provides for continuity of life. MLP is not treated as an entity; it is treated as
partnership for which income is allocated pro-rata to the partners. The advantage
of MLPs is the combination of the tax benefits of a limited partnership with the liquidity of
a publicly traded company.
MLPs allow for pass-through income, meaning that they are not subject to corporate
income taxes. The partnership does not pay taxes from the profit - the money is only
taxed when unit holders receive distributions. The owners of an MLP are
personally responsible for paying taxes on their individual portions of the MLP's
income, gains, losses, and deductions. This eliminates the "double taxation" generally
applied to corporations (whereby the corporation pays taxes on its income and the
corporation's shareholders also pay taxes on the corporation's dividends). That is,
MLP is taxed as partnership avoids double taxation and the business achieves a
lower effective tax rate. The lower cost of capital resulting from the reduced
effective tax rate provides the partnership with a competitive advantage when
vying against corporations during competitive asset sales or bidding wars and can
ultimately provide a higher return to unit holders.
o Roll Up MLP
Formed by the combination of two or more partnership into one publicly traded
partnership
Liquidation MLP:
Formed by a complete liquidation of a corporation into an MLP
o Acquisition MLPs:
o Start Up MLP:
Formed by partnership that is initially privately held but later offers its
(BOOK ID –B1036)
The value chains of the acquirer and the acquired, need to be integrated in order to
achieve the value creation objectives of the acquirer. This integration process has
three dimensions: the technical, political and cultural. The technical integration is similar
to the capability transfer discussed above. The integration of social interaction and
political relationships represents the informal processes and systems which
influence people’s ability and motivation to perform. At the time of integration,
the acquirer should have regard to these political relationships if acquired
employees are not to feel unfairly treated. An important aspect of integration is the
cultural integration of the acquiring and acquired firms. The culture of an organization
is embodied in its collective value systems, beliefs, nor ms, ideologies myths and
rituals. They can motivate people and can become valuable sources of efficiency and
effectiveness. The following are the illustrative organizational diverse cultures which
may have to be integrated during post-merger period:
Power
The main characteristics are: essentially autocratic and
Role
Task/achievement
Perso n/support
2. What are the accounting treatment of share premium, goodwill and other profits
Goodwill
Goodwill represents the difference between the value of the assets of the acquired
company at the date of acquisition by acquiring company and the cost in investments for
acquired company. It is an intangible asset and is available for a takeover of going
concern.
Other Profits
The retained earnings and capital reserves of acquired company in the year before
acquisition may be passed on to the acquiring company on merger which requires
treatment in accounts of the acquiring company as pre-acquisition profit. The
question arises whether these profits could be taken as current income of the acquiring
company or be treated as capital profit. These accounting problems solicit appropriate
solutions in the light of the existing accounting practices and the tax laws. Similarly,
the problems of accounting remain to be settled in respect of: profit in the year of
acquisition of the company being acquired, profit of the company on consolidation after
merger and post acquisition accounts etc.
a. White Square
The white square is a modified form of a white knight. The difference being
that the white squire does not acquire control of the target. In a white square
transaction, the target sells a block of its stock to a third party it considers to be
friendly. The white squire sometimes is required to vote its shares with the target
management. These transactions often are accompanied by a stand-still
agreement that limits the amount of additional target stock the white square
can purchase for a specified period of time and restricts the sale of its target
stock, usually giving the right of first refusal to the target. In return, the white
square often receives a seat on the target board, generous dividends, and/or a
discount on the target shares. Preferred stock enables the board to tailor the
characteristics of that stock to fit the transaction and so usually is used in white
square transaction.
b. Poison Put.