Firms in Divesture.

7/29/2019 Firms in Divesture.

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Name of Institution

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Beyond cash dividends: Buybacks, spinoff and divestures.


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Name of InstitutionAlternative ways of returning

cash to stockholders Equity repurchase---paying dividends andbuying back stocks have same effect on a

firm. The cash assets of the firm decline

by the amount of the stock buyback or

dividends.

The process of buyback----if more than

10% are bought back, it has go by tenderoffer. It has to specify number of shares,

period of time and price.

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Sometimes, it keeps the option to

withdraw the offer if insufficient offers

come. they also use the services of

investment bankers.

If the number is smaller than 10%, it can

go through open market repurchase.

Difference between tender offer and open

market repurchase------1open market,

firm purchases at market rate and in

tender offer 3


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Premium is offered..2in open market

purchase firm do not have to disclose

publicly their intent to buy back , however

regulator rules have to be complied. 3In

open market purchase can be spread over

much longer period.

Other alternative is available to the firmthat it can negotiate with the big

stockholder for purchase,

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5/22

Name of InstitutionAdvantages of buyback over

cash dividend to firms Dividend record has to be maintained butbuy back is one time return of cash.

uncertainty about future cash flows make

buy back a better option.

The buy back can be reversed.

Buy back offers greater control to the

promoters to increase their holding.

Buy back helps holding share price.

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Name of InstitutionAdvantage to share holders in

buy back Tax benefit if dividend is taxed. Shareholders who want to sell only can

exercise the option.

In short, equity repurchase allows firms to

return cash to stock holders and still

maintain flexibility for future periods.

Reduces shares, increases EPS and with

same PE, price may go up.

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However, the price of the share going up

or going down is dependant upon the

resultant DER after buy back.

The buy back can give a message to the

outsiders that future is uncertain and cash

flows doubt full.

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Name of InstitutionDividend vs. equity repurchase

Sustainability and stability of excess cash

flows---if cash flows are temporary or

unstable-buyback is better.

Stockholders tax preference.

Predictability of future investment needs.

Undervaluation of the stock. Management compensationESOP.

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Name of InstitutionForward contracts to buy equity

Commitment so good signaling. Increases

risk .

The decision of forward contracts will

depend upon Trade off between signaling

effect and risk/flexiblity.

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Name of InstitutionStock split

No cash is paid out and the split does not

alter the proportional ownership of the

concern.

As dividend , there is ex- date , book

closure date.

Reason of spilt is that some firms want to

keep their price in a range. Widely held

range will be beneficial.

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Transaction cost will also be considered.

One school of thought will say that spilt

shows that firm expects increase in

earnings. Some studies have shown that

split has unintended effect on stockholders

because of transaction cost.

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Name of InstitutionReason of stock dividends,

Some view that it is fooling exercise and

firm is in trouble and paying regular cash

dividend is not possible.

Others view, stock dividends as a

supplement to cash dividends and use

them in times of high earnings.

Stock splits and stock dividends change

the number of shares outstanding/

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Name of InstitutionDivesture

A firm sells assets or division to the

highest bidder. On a sale , firm gets cash

which is either rein invested or returned to

the shareholders.

It can be initiated by both parties and if it

has substantial value will engage

investment banker.

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Name of InstitutionHoe divesture effects firm value

If the divesture value is equal to the

present value of expected cash flows it will

have no effect.

If the divesture value is greater than

present value of cash flows, it will be

beneficial or vice versa.

The reason of divesture can be buyer

may be more efficient in its utilization---

need of cash or rolling back diversification.

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Name of InstitutionMarket reaction to divesture

View with skepticism , the firms that are

evasive about the reason of divesture.

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Name of InstitutionSpinoffs/splitoffs/spiltups

In a spinoff , a firm carves out a division

and creates new shares with claims on

this portion of the business. Existing

shareholders in the firm receive theseshares in proportion to their original

holding. They can hold these shares or

sell in market.

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Name of InstitutionSpit up

Spilt up is expended version of spinoff ,

the firm splits into business lines ,

distributes shares in these business lines

to the original stockholders in proportion totheir ownership in the original firm and

then ceases to exist.

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Name of Institutionspilt off

Similar to spinoff, but the existing

shareholders are given the option to

exchange their parent company stock for

these new shares , which changes theproportional ownership in the new

company.

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Name of InstitutionDifferences between divesture

and spinoff No cash is generated for the firm inspinoff.

New management takes over spinned off

unit.

Spinoff can be a effective way of creating

value when subsidiaries or divisions are

not proving to be effective,

Spinoff saves taxes.

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Name of InstitutionEquity carve out

In a equity carve out, a firm separates out

assets or a division , creates shares with

claim on these assets. And sells them to

public.

In general, the parent company retains

control but in some equity carve outs are

follwed by spinoffs.

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Name of InstitutionReasons of equity carve outs

It allows conglomerates to

deconglomorates.

Difference between carve outs and

spinoffs----carve outs bring in cash and

retains control.

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Name of InstitutionTracking stocks

Companies create shares in division or

subsidiaries that track the performance of

just these units.

mostly tracking stocks have no voting

rights. Liquidation rights as equity holders.

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Firms in Divesture.

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