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Prof. Ian GiddyNew York University
Corporate Break-Ups
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Mergers, Acquis i t ions & Divest i tures
Mergers & Acquisitions
DivestituresValuation
Concept: Is a division or firm worth morewithin the company, or outside it?
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Breaking Up
WhyThe business may be worth moreoutside the company than within
HowSell to another company, or to the
public, or give it to existing shareholders Tax AspectsAs a rule if you get paid in cash
you realize a taxable gain; not otherwise
Effect on ShareholdersThe bigger the part
sold off, the greater the percentage gain
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Case Study: Pinault-Printemps-Redoute
Why?
How?
Tax Aspects?
Effect on Shareholders
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Why Break Up?
Pro-active Defensive
Involuntary
Examples of each?
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Why Break Up?
Pro-active (GM tracking/selling DirectTV) Defensive (ABB selling ABB Cap Lease)
Involuntary (ATT breakup, Enron)
Examples of each?
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Why Break Up?
Post-acquisition disposals Shift of core business or strategy
Underperforming business or mistake
Lack of fit, refocus on core business
Avoid competing with customers
Antitrust compliance Need for funds
Market or litigation risk
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Tax Consequences
The spin-off and related techniques havethe advantage that they can be
structured so as to be tax free (USA)
Tax Code Section 355 requirements:Both the parent company and the spun-off
entity must be in business for at least 5
yearsThe subsidiary must be at least 80% owned
by the parent
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Breaking Up
Spin-Off Split-Up Tracking Stock
Tax-Free
Divestiture Equity Carve-OutSplit-Off IPO
Bust-Up
Taxable
Breaking up
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Tax-Free Breakups
Spin-offspro-rata distribution by a company of all
its shares in a subsidiary to all its own shareholders
Split-offssome parent-company shareholders
receive the subsidiary's shares in return for their
shares in the parent
Split-upsall of the parent company's subsidiaries
are spun off and the parent company ceases to exist
Tracking Stockspecial stock issued as dividend:
pays a dividend based on the performance of a
wholly-owned division
Spin-Off Split-Up Tracking Stock
Tax-Free
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Tracking Stock
Tracking stock, sometimes known as letter
stock or alphabet stock, is a class of stock
designed to reflect the value and track the
performance of a part of the issuer's assets,usually a separate business or group of
businesses. Claimed advantages:
preservation of the efficiencies of a single
corporationability of the market to more accurately value the
respective businesses of the issuer
What does it really add?
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Taxable Breakups
Divestituresthe sale of a division of the
company to a third party
Equity carve-outssome of a subsidiarys
shares are offered for sale to the general
public
Split-off IPOsa private company offers a partof the company to the public
Bust-upsvoluntary liquidation of all of the
companys business
Divestiture Equity Carve-OutSplit-Off IPO
Bust-Up
Taxable
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Divest i tures Can Add Value
Shareholders of the selling firm seem to
gain, depending on the fraction sold:
% of firm sold Announcement effect
0-10%10-50%
50%+
0+2.5%
+8%
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Divest i tures Can Add Value
Value of combined company
Value of seller without sub + value of sub
(Seller may gain from more managerial focus,
lower WACC, less conglomerate discount)
Value of substandalone value
Value of subacquisition value to
another company
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Break-up Compu tat ion
PPR with Finaref PPR without Finaref Finaref Standalone Finaref with CAEBITDA 800 500 300 330
Tax rate 40% 40% 40% 40%
Beta 1.4 1 1.6 1.6
Growth rate 3.50% 2.50% 4% 4.50%
Equity 8,000 6,000 3,000 3,500
Debt 7,000 5,000 0 0
Risk Free 3% 3% 3% 3%Mkt Risk Premium 7% 7% 7% 7%
Debt spread 3% 2% 4% 2%
Re 12.80% 10.00% 14.20% 14.20%
Rd 6.00% 5.00% 7.00% 5.00%
WACC 8.51% 6.82% 14.20% 14.20%
Enterprise PV 16,538 11,868 3,059 3,555
Equity PV 9,538 6,868 3,059 3,555Additional Gains/losses 1,187 0 - 1,400
Choice 9,538 11,114 10,155
Source: breakup.xls
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Framework for Assess ing
Restructu r ing Oppo rtuni t ies
RestructuringFramework
1
2
CurrentMarketValue
3
Total
restructuredvalue
Potentialvalue withinternal+ externalimprovements
Potentialvalue withinternalimprovements
Companys
DCF value
Maximumrestructuringopportunity
Financialstructureimprovements
4
Disposal/Acquisitionopportunities
Operatingimprovements
Current marketoverpricing orunderpricng
5
(Eg Increase D/E)
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Using The Restructu r ing Framework($ Mil lion s of Value)
RestructuringFramework
1
2
CurrentMarketPrice
3
Optimal
restructuredvalue
Potentialvalue withinternaland externalimprovements
Potentialvalue withinternalimprovements
Company
value as is
Maximumrestructuringopportunity
Financialengineeringopportunities
4
Disposal/Acquisitionopportunities
Strategicand operatingopportunities
CurrentperceptionsGap: Premium
5
$ 25
$ 975
$ 300
$ 1,275
$ 350
$ 1,625
$ 10
$ 1,635
$ 635
$1,000
Eg Increase D/E
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Marriot t
The Choice the decision of whether to split Marriott
Corp. into two companies--MarriottInternational and Host Marriott
The Situation decline in real estate values
has a significant percentage of assetsin hotels it had planned to sell
difficult for Marriott to pursue growthstrategies
market price of the company had
declined significantly
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Marr iot t: Assignment
Will this type of reorganizationmeaningfully improve the company?
What are the different way of effectingbreak-ups? In the Marriott case, are there
reasonable alternative approaches? Draw up a spreadsheet comparing the
before-and-after capital structure ofMarriott and its proposed component parts
How are bondholders affected? How canthey protect their interests?
Make a recommendation, and justify it.
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Marriot t : Project Chariot
Marriott Corp.
Marriott Intl. Host Marriott Corp.
Intangibles
Franchises Management
Services
DistributionServices
Timeshares
Hotels
Airport andRoad Plazas
Land
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Marr iot t : B reaking Up
Spin-Off Split-Up Tracking Stock
Tax-Free
Divestiture Equity Carve-OutSplit-Off IPO
Bust-Up
Taxable
Breaking up
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Marr iot t : Financial Restructu r ing
Marriott Corp. Marriott Intl Host Marriott
Long-term debt 2732 378 2362
LYONs 228 205.2 22.8
Convertible preferred 200 200Shareholders' equity 585 524 61
Total long-term capital 3745 1107.2 2645.8
Long-term debt/Total 73% 34% 89%
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Corporate Restructu r ing
Divestiturea reverse acquisitionisevidence that "bigger is not necessarily
better"
Going privatethe reverse of an IPO(initial public offering)contradicts the
view that publicly held corporations are
the most efficient vehicles to organizeinvestment.
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Con tact Info
Ian H. Giddy
NYU Stern School of Business
Tel 212-998-0426; Fax 212-995-4233
http://giddy.org
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