Spin-Offs

• A corporate spin-off, also known as a spin-

out, or starburst, is a type of corporate
action where a company "splits off" a section
as a separate business.
 Meaning of Spin-off

• Process of splitting off certain parts of the company

and found them as a separate independent business.
Or
• The event through which a new company is created
and separated from its parent company. After the
event there are two separate companies. The new
company becomes independent business with
assets, employees, intellectual property, technology
etc.
 Characteristics

• Spin-offs are divisions of companies or

organizations that then become independent
businesses with assets, employees, intellectual
property, technology, or existing products that
are taken from the parent company.
• Shareholders of the parent company receive
equivalent shares in the new company in order to
compensate for the loss of equity in the original
stocks.
• However, shareholders may then buy and sell
stocks from either company independently; this
potentially makes investment in the companies
more attractive, as potential share purchasers can
invest narrowly in the portion of the business
they think will have the most growth.
• In contrast, divestment can also sever one
business from another, but the assets are sold off
rather than retained under a renamed corporate
entity.
• The shares of the new company are given to the
shareholders of the existing company on a pro rata
basis. Each shareholder holds shares in both companies
at the moment of spinoff.
• Many times the management team of the new
company are from the same parent organization.
Often, a spin-off offers the opportunity for a division to
be backed by the company but not be affected by the
parent company's image or history, giving potential to
take existing ideas that had been languishing in an old
environment and help them grow in a new
environment.
• Spin-offs also allow high-growth divisions,
once separated from other low-growth
divisions, to command higher valuation
multiples.
 Reasons for Spinoff
• The company has adopted a strategy to focus on its
core activities. Non-core related activities are spun
off.
• The company thinks that the spun off activities can
be better developed on their own, rather than as
part of a bigger concern.
• The company thinks that it can make more money by
spinning the activities off. E.g: it could be that the
spun off company yet needs to prove it can be
profitable.
• Sometimes the activities don’t fit in the overall branding
strategy of the parent company.
• The spun off company can try to seize opportunities it
would normally not be able to explore.
• Newly independent entities are no longer constrained by
the overall culture of the parent company that might not
fit.
• And also a spin-off lets a company avoid the potentially
large capital gains tax liability that a straight sale would
incur. Spin offs are the most tax efficient mechanism to
separate a division.
• In finance and economics, divestment or dives
titure is the reduction of some kind
of asset for financial, ethical, or political
objectives or sale of an existing business by a
firm. A divestment is the opposite of
an investment.
 Divestiture

A divestiture or divestment is the reduction of

an asset or business through sale,liquidation,
exchange, closure, or any other means for
financial or ethical reasons. It is the opposite
of investment.
• (Example):
• Let's assume Company XYZ is the parent of a
food company, a car company, and a clothing
company. If for some reason Company XYZ
wants out of the car business, it
might divest the business by selling it to
another company, exchanging it for
another asset, or closing down the car
company.
 What are some of the more common
reasons divestiture occurs?
• In finance, divestment or divestiture is defined
as disposing of an asset through sale,
exchange or closure.
• A divestiture is an important means of
creating value for companies in the mergers,
acquisitions and consolidation process.
• A common reason for divestiture is selling a
non-core line of business.
• Companies also divest as part of
the bankruptcy process, as well as to obtain
funds, enhance stability and break themselves
into parts believed to have greater value than
the consolidated company.
• In addition, companies engage in divestiture
to eliminate subsidiaries or divisions that are
underperforming and to comply with
regulatory requirements.
• Companies may divest businesses that are not
part of their core operations so that they can
focus on their primary lines of business.
• In 1989 Union Carbide, a well-known
manufacturer of industrial chemicals and
plastics, decided to spin off its non-core
consumer group business so it could focus
more on its core business matters.
• Companies often undergo bankruptcy due to
their operating and financial problems, and
divestiture is almost always part of this process
when a healthier company emerges out of the
bankruptcy.
• General Motors filed for bankruptcy in 2009 and
closed at least 11 unwanted factories. It divested
some of its unprofitable brands, such as Saturn
and Hummer, as part of its reorganization plan.
• Another common reason for divestiture is to
obtain funds. This is especially important for
companies experiencing operating and financial
difficulties.
• For example, Sears Holdings, a consumer retail
company, struggled with declining sales and
negative cash flows.
• In 2014, as part of its survival plan, the company
announced a divestiture of its real estate holdings
to raise funds to continue reorganizing its retail
business.
• Companies often divest to improve their
bottom-line stability.
• In 2006 Philips, a Dutch diversified technology
company, decided to divest its chip subsidiary,
NXP Semiconductors.
• The primary reason for selling NXP was a high
volatility and unpredictability of earnings for
the chip business, which was hurting Philips'
stock value.
• A firm often breaks up into two or more
companies to unlock value believed to be greater
for separate entities than that of a consolidated
company.
• This is especially important during liquidation. For
example, investors are willing to pay much more
for different parts of the company separately,
such as real estate, equipment, trademarks,
patents and other parts, than to buy one single
company.
 Equity carveout

• Definition: The Equity Carveout is the

corporate strategy wherein the company sells
a portion or a division in a wholly owned
subsidiary through the IPOs and retain the full
control over the management.
• Under this arrangement, limited shares are
offered to the public, while the majority stake
is retained by the parent company.
• Usually, more than 50% shares are held by the
parent company with the intent to exercise
control over the management of the
subsidiary, so formed.
• The parent company may distribute its shares
either among the existing shareholders of the
new company or list them on the stock
exchange so that it could be purchased by the
potential investors.
• Another form of equity carveout is spin-off,
but, however, both are different from each
other. In the case of a spin-off, the shares of
the spun-off company are distributed among
the existing shareholders of the parent
company, while in the case of equity
carveout the shares are distributed to new
potential investors.
• Another difference between these two is, the
equity carveout brings cash into the parent
company whereas in spin-off no such cash is
infused into the base company.
• The companies adopt the equity carveout
strategy to enhance the business value by
disposing of the less profitable business
undertakings and realizing cash that can be
used in improving the core business activities.
• Equity carve-out (ECO), also known as a split-
off IPO or a partial spin-off, is a type of corporate
reorganization, in which a company creates a
new subsidiary and subsequently IPOs it, while
retaining management control.
• Only part of the shares are offered to the public,
so the parent company retains an equity stake in
the subsidiary. Typically, up to 20% of subsidiary
shares is offered to the public.
 Entities
• The transaction creates two separate legal
entities, the parent and the daughter company,
each with its own board, management team,
CEO, and financials.
• Equity carve-outs increase the access to capital
markets, giving the carved-out subsidiary strong
growth opportunities, while avoiding the negative
signaling associated with a seasoned
offering (SEO) of the parent equity.
Toeholds in Mergers & Acquisitions
• In the process of acquiring a target company, a
toehold can present a strategic opportunity to
buy a limited number of shares in the company
and carry out a takeover in a later stage.
• A toehold is an ownership interest in a target
firm, which is purchased by a potential acquirer
before any merger or acquisition discussions, is
initiated (Strickland et al., 2010).
• Toeholds therefore can be an important part
of a successful bidding strategy due to the fact
that they can lower the risk and costs involved
in a takeover.
• Nevertheless, they are not without risks and
can lead to unpleasant outcomes under
certain circumstances
 Strategic rational of toeholds
• Once the toehold position’s been taken, the
investor – or investment firm – is likely to begin
making additional purchases of the target
company’s outstanding shares.
• The investor typically continues with small
percentage purchases of shares because it can be
done quietly.
• The purchases are more likely than not to go
unnoticed or viewed as non-threatening by the
target company.
• Alternatively, rather than an acquisition, a toehold
position can be used as a way to drive pressure into a
firm.
• This is usually done to push the firm to make decisions
that will increase their market value, increasing return
for the investor.
• Often, the investor in a toehold position will make
demands of the firm to take specific actions that they
believe will increase performance.
• The goal is to increase market value and shareholder
returns, thus increasing their own returns.
• As noted, an investor or investment firm often
makes use of a toehold position when they
are planning on making a move toward the
takeover of the company whose shares
they’ve purchased.
• A toehold position is the first in a series of
strategic moves an investor makes when it
looks to acquire or take over the target
company.
• The primary goal – when pursuing
an acquisition or takeover – is to quickly and
quietly build up a cache of the target
company’s outstanding shares. It enables the
acquirer to gradually obtain a greater equity
interest in, and more control of, the target
company.
 What is a Friendly Takeover?

• In M&A transactions, a friendly takeover is

referred to as the acquisition of a target
company by a bidder with the consent of the
management and board of directors of the
target company.
• A friendly takeover is the opposite of a hostile
takeover.
• The latter is a type of acquisition in which a
bidder acquires a target company without the
consent of the management and/or
shareholders of the target.
 Components of a Friendly Takeover

• 1. Public offer of cash or stock

• Generally, a friendly takeover is a public offer
of cash or stock made by a bidding company
that is given to the board of directors of the
target company for approval.
• 2. Premium per share
The per share stock price paid by the acquirer
to the shareholders of the target company is a
key determinant of the success of the deal.
• In most cases, the acquirer must pay a
significant premium per share to secure the
approval of the target company’s
shareholders.
• 3. Shareholders’ approval
• When an offer is received by the target
company’s board of directors, shareholders with
voting rights vote for the approval of the
transaction. Typically, the approval requires the
majority of the votes (i.e., more than 50%).
• However, some companies include supermajority
provisions in their corporate charters that require
a larger percentage of shareholders approving
the transaction (the number may vary between
70% to 90%).
• 4. Regulatory approval
• Even if the shareholders of the target
company approve the acquisition, the deal is
still subject to the approval of a regulatory
body (e.g., Department of Justice).
• The government regulator may disapprove a
friendly takeover if the deal violates
competition (also known as antitrust or anti-
monopoly) laws.
• Other buyout terms also play a crucial role
since the offer is a comprehensive legal
document that includes several provisions and
clauses.
• For example, the buyout terms may include
provisions regarding the brand and operations
of the target company, as well as the inclusion
of key shareholders of the target company in
the board of directors of the acquirer.
 Advantages of a Friendly Takeover

• Generally, friendly takeover deals deliver substantial advantages to

both bidders and target companies relative to the hostile takeover.
Some of the advantages include the following:
• The involvement of both parties (bidder and target company)
ensures the better design of the deal and value delivery to the
participating parties.
• The target company does not incur costs due to the agency
problem and/or does not erase its value due to the employed
defense mechanisms to prevent a hostile takeover.
• The bidder incurs reasonable costs to acquire a target company. The
per share premium is primarily based on the growth prospects of
the target company and potential synergies created as a result of a
deal.
 DEVELOPING A MERGER AND
ACQUISITION BIDDING STRATEGY
• The tactics that may be used in developing a
bidding strategy should be viewed as a series of
decision points, with objectives and options
usually well defined and understood before a
takeover attempt is initiated.
• Pre-bid planning should involve a review of the
target’s current defenses, an assessment of the
defenses that could be put in place by the target
after an offer is made, and the size of the float
associated with the target’s stock.
• Poor planning can result in poor bidding,
which can be costly to CEOs. Studies show
that almost one-half of acquiring firms CEOs
are replaced were replaced within five years
of a major acquisition.
• Moreover, top executives are more likely to be
replaced at firms that had made poor
acquisitions sometime during the prior five
years.
• Common bidding strategy objectives include
winning control of the target, minimizing the
control premium, minimizing transaction costs,
and facilitating post-acquisition integration.
• If minimizing the cost of the purchase and
transaction costs, while maximizing cooperation
between the two parties is considered critical,
the bidder may choose the ‘friendly’ approach.
• The friendly approach has the advantage of
generally being less costly than more aggressive
tactics and minimizes the loss of key personnel,
customers, and suppliers during the fight for
control of the target.
• Friendly takeovers avoid an auction environment,
which may raise the target’s purchase price.
Moreover, friendly acquisitions facilitate pre-
merger integration planning and increase the
likelihood that the combined businesses will be
quickly integrated following closing.
• Bidders often initiate contact casually through an
intermediary (i.e. a casual pass) or through a more formal
inquiry.
• The bidder’s options under the friendly approach are to
either walk away or to adopt more aggressive tactics if the
target’s management and board spurn the bidder’s initial
offer.
• If the choice is to become more aggressive, the bidder may
undertake a simple bear hug to nudge the target toward a
negotiated settlement due to pressure from large
institutional shareholders and arbitrageurs (i.e. investors
who typically attempt to profit from M&A transactions by
buying the target’s shares and selling the acquirer’s shares
short
• Short-selling refers to the practice of selling
borrowed shares whose price is expected to
fall and then repurchasing them at a lower
price, returning the shares to the original
owner, and profiting on the difference
between the selling and repurchased prices..
 Takeover Bid

• What is a Takeover Bid

• A takeover bid is a type of corporate action in
which an acquiring company makes an offer to
the target company's shareholders to buy the
target company's shares to gain control of the
business. Takeover bids can either be friendly
or hostile.
 BREAKING DOWN Takeover Bid

• Some examples of takeover bids include:

• Two-Tier Bid: The acquiring company is willing
to pay a premium above and beyond the
share's price to convince shareholders to sell
their shares.
• Any-and-All Bid: The acquiring company offers
to buy any of the target firm's outstanding
shares at a specific price.
 The various kinds of takeover
strategies are as follows
• Casual Pass: Casual pass is a process in which
bidders often initiate contact casually through
an intermediary or through a more formal
inquiry.
• The bidder’s options under the friendly
approach are to either walk away or to adopt
more aggressive tactics if the target’s
management and board spurn the bidder’s
initial offer.
• Bear Hug: Bear Hug is an offer made by one
company to buy the shares of another for a much
higher per-share price than what that company is
worth.
• A bear hug offer is usually made when there is
doubt that the target company’s management
will be willing to sell.
• The name “bear hug” reflects the persuasiveness
of the offering company’s overly generous offer
to the target company.
• Tender Offers: Tender offer is a corporate
finance term denoting a type of takeover bid.
The tender offer is a public, open offer or
invitation (usually announced in a newspaper
advertisement) by a prospective acquirer to all
stockholders of a publicly traded corporation
(the target corporation) to tender their stock
for sale at a specified price during a specified
time, subject to the tendering of a minimum
and maximum number of shares.
• Proxy Fights: Proxy fight refers to the process
when a group of shareholders are persuaded
to join forces and gather enough shareholder
proxies to win a corporate vote.
• This is referred to also as a proxy battle. The
acquirer will persuade existing shareholders to
vote out company management so that the
company will be easier to takeover.
• Fairness Opinion: Fairness Opinion is a report
evaluating the facts of a merger or acquisition.
Fairness opinions are compiled by qualified
analysts or advisors, usually of an investment
bank, for key decision makers. The report
examines the fairness of the offered
acquisition price.
 POISON PILL STRATEGIES
• Poison pill strategies are defensive tactics that allow
companies to thwart hostile takeover bids from other
companies.
• Many companies may find themselves unprepared
when facing such bids.
• By adopting a poison pill strategy, a company can be
somewhat reassured that acquiring companies will
approach its board of directors, not the shareholders.
Poison pill strategies are also known as shareholders'
protection rights plans.
 HISTORY
• During the late 1950s and early 1960s, several large
corporations began acquiring other companies to
diversify their operations.
• Diversification allowed them to offset their losses in
a failing industry with profits from other unrelated,
successful industries.
• Such phenomena caused concerns about the
potential of conglomerates to concentrate excessive
economic power in the hands of a few corporations.
• This led to the passage of the Williams Act in
1968, which required the acquiring company
to fully disclose the terms of an impending
acquisition and to allow a period for
competing offers for the target company to be
made. By the late 1970s, the pace of
acquisition nearly came to a halt.
• The poison pill term originated from the era of
wars and espionage, where spies carried toxic
pills that could be ingested to avoid capture.
Spies would swallow these pills if they thought
they were about to be caught, similarly to how
a target company may employ poison pill
tactics to avoid hostile takeovers.
• In the world of corporate finance, the “poison
pill” term originated in the United States.
These tactics were designed to have
detrimental effects to any acquirer who, if by
aggressive means, decided to take over the
company employing the poison pill.
• The tactic was first employed by the firm
Wachtell, Lipton, Rosen, and Kantz. Martin
Lipton invented the tactic as a defense during
a takeover battle in the 1980s.
• His client, a firm called General American Oil,
was in the sights of T. Boone Pickens.
• Martin Lipton advised the board of directors
of General American Oil to flood the market
with new shares of the company’s stock,
thereby reducing the value of each individual
share.
• This effectively diluted the ownership that
was to be potentially acquired by Pickens,
discouraging the unsolicited acquisition.
 Types of Poison Pills

• Since Lipton employed the poison pill, various

techniques have developed.
• The general idea, however, is to dissuade any
outside takeover attempt by either making the
company less desirable or by putting current
shareholders at a higher point of power.
• Both of these can be accomplished by selling
cheaper shares to existing shareholders, thereby
diluting the potential equity an acquirer receives,
and also providing more equity to existing
shareholders.
• A common type of poison pill is the flip-in
provision.
• The Flip-In Provision
• The flip-in strategy entitles existing shareholders
to acquire shares of the company at a discount.
This discount is often substantial, allowing
existing shareholders to consolidate their equity
claim in the portion of the company that is not
acquired by the acquirer.
• This right to purchase is given before the
takeover or acquisition is finalized, and will
often be triggered when the acquirer
surpasses a certain ownership percentage
threshold.
• The purchase of discounted shares of the
company dilutes the acquirer’s equity,
reducing the value received for the price paid
by the acquirer.
• All shareholders are also now equally less
powerful when it comes to board votes
because each share now holds less of the
overall company.
• However, existing shareholders (excluding the
acquirer) will have effectively concentrated
power due to the purchase of discounted
shares.
 Effectiveness

• Poison pills can be very effective in dissuading

a purchase but are often not the first line of
defense.
• This is because it is not entirely guaranteed to
work, as a poison pill will not necessarily
prevent the acquisition of the corporation if
the acquirer is persistent or knowledgeable.
• Furthermore, poison pills may weaken the
company, if employed incorrectly.
 Examples of Poison Pills

• In 2012 Netflix adopted a Poison

Pill (shareholder rights plan) to fend off Karl
Icahn from a hostile takeover.
• Upon learning that Icahn acquired a 10%
stake in the company, Netflix immediately put
on the defensive by swallowing a poison pill.
• In doing so, they prevent Icahn from
continuing to receive a higher stake in the
company, by making it more costly to do so.
• Any attempt to buy a large position of
ownership of Netflix without board approval
would result in flooding the market with new
shares, making any stake attempt expensive.
 Disadvantages of Poison Pills

• There are three major potential disadvantages to

poison pills.
• The first is that stock values become diluted, so
shareholders often have to purchase new shares just to
keep even.
• The second is that institutional investors are
discouraged from buying into corporations that have
aggressive defenses.
• Lastly, ineffective managers can stay in place through
poison pills; otherwise, outside venture
capitalists might be able to buy the firm and improve
its value with better managing staff.
 flip-over poison pill”
• A “flip-over poison pill” strategy provisions for
stockholders of the target company to purchase the
shares of the acquiring company at a deeply
discounted price, if the hostile takeover attempt is
successful.
• For example, a target company shareholder may gain
the right to buy the stock of its acquirer at a two-for-
one rate thereby diluting the equity in the acquiring
company.
• The acquirer may avoid going ahead with such
acquisitions if it perceives a dilution of value post-
acquisition.
 What is a Hostile Takeover?

• A hostile takeover, in mergers and acquisitions

(M&A), is the acquisition of a target company
by another company (referred to as the
acquirer) by going directly to the target
company’s shareholders, either by making a
tender offer or through a proxy vote. The
difference between a hostile and a friendly
takeover is that, in a hostile takeover, the
target company’s board of directors do not
approve of the transaction.