Restructuring the corporation through sell-offs, spin-offs, carve-outs and split-offs

Summary

This video explores how managers can restructure firms through sell-offs, spin-offs, carve-outs, and split-offs. It emphasizes the importance of divestiture for value creation, contrasting it with the common bias against it. The video explains the reasons behind conglomerate breakups and details the four methods, highlighting their features and strategic implications, using examples like Ford's sale of Jaguar and Land Rover, and Toshiba's reorganization.

Takeaways

• 🚀 Divestiture is crucial for value creation and should be part of a proactive corporate strategy.
• 🔍 Managers often overlook the importance of exiting businesses that no longer align with the company's goals.
• 📉 There's a bias against divestiture, but it can be vital for addressing financial crises or reducing capacity in industries with falling demand.
• 💹 Studies show that companies that effectively divest can significantly outperform their peers in terms of shareholder value.
• 📉 The stock market often values diversified companies at a discount compared to less diversified ones.
• 🏢 Reasons for conglomerates to break up include outdated business models, complex financials, over-diversification, and the diminishing advantages of vertical integration.
• 💼 Innovations in strategic management and information technology have made it easier to manage without joint ownership.
• 💼 Sell-offs are a straightforward method of exiting businesses, where a company sells assets or divisions to another entity.
• 🌀 Spin-offs create a separate legal entity from a division or subsidiary, allowing it to operate independently and potentially increase in value.
• 🔄 Carve-outs involve selling a portion of a business to outside investors, often to establish a market value and provide a cash inflow to the parent company.
• 🔄 Split-offs give shareholders the option to exchange some or all of their parent company shares for shares in a subsidiary, post carve-out.

Q & A

What is the primary reason managers should consider divestiture as part of their corporate strategy?

Managers should consider divestiture to unlock higher value for shareholders, sharpen the focus of the corporation, and adjust downside threats such as financial crises or reduced capacity due to falling demand.

Why do firms tend to acquire more businesses than they divest?

There is often a strong bias against divestiture, and firms may wait until they are in an emergency situation, which limits their options and reduces the value they can harvest from divestiture.

What are the four reasons investors find highly diversified companies less attractive?

Investors find highly diversified companies less attractive because: 1) their business model may not require being in many different industries, 2) complex financial statements make performance assessment harder, 3) managers often pursue diversification for the wrong reasons, and 4) innovations in strategic management have diminished the advantages of vertical integration and diversification.

How did the study by Bain and Company demonstrate the value of divestiture?

The study found that an investment of $100 in the average company in 1987 would have been worth about $1,000 at the end of 2007, but the same investment in a portfolio of the best divesters would have increased in value to over $1,800.

What is a sell-off and how did Ford Motor Company use it?

A sell-off is when a firm sells its businesses or assets to a buyer. Ford Motor Company used a sell-off in 2008 to sell Jaguar and Land Rover to Tata Motors for $2.3 billion to raise cash quickly amidst a risk of bankruptcy.

What is the difference between a spin-off and a spin-out?

A spin-off is an intentional divestment decision made by managers to make a division or subsidiary into a separate legal entity, while a spin-out is an independent decision made by employees who leave to start a new venture.

How does a carve-out differ from a spin-off?

A carve-out is a partial divestiture where a parent company sells some portion of a business unit to outside investors, resulting in a cash inflow to the corporate parent, unlike a spin-off which does not provide cash to the parent company.

What is a split-off and how is it related to a carve-out?

A split-off occurs when shareholders in the parent company are offered the opportunity to hold shares in the subsidiary instead of some or all of their shares in the parent company. It is sometimes followed by a carve-out to allow shareholders to trade shares in the parent for shares in the subsidiary.

Why might a company choose to spin off only a portion of a division's shares?

A company might choose to spin off only a portion of a division's shares to retain some control over the division while still allowing it to operate independently and potentially increase in value.

What is the significance of Toshiba's reorganization in 2022 as an example of corporate strategy?

Toshiba's reorganization in 2022, which included separating into two standalone companies and selling off non-core assets, serves as an example of how a major conglomerate can reorganize to unlock more value and become more focused and flexible.

Why is it beneficial for a subsidiary to trade under its own stock after a divestiture?

It is beneficial for a subsidiary to trade under its own stock because it can potentially rise faster in value than the corporate parent stock, especially if it is in an industry with better growth prospects or is more attractive than the overall corporate portfolio.

Outlines

00:00

🔄 Corporate Restructuring: Sell-offs, Spin-offs, Carve-outs, and Split-offs

This paragraph discusses how managers can restructure a firm through various methods such as sell-offs, spin-offs, carve-outs, and split-offs. It emphasizes the importance of divesting businesses that no longer contribute to the firm's value and how this can be beneficial for both upside opportunities and downside threats. The paragraph also highlights the bias against divestiture and the mistake of waiting until a firm is in crisis to consider it. The benefits of proactive divestiture are illustrated with a study by Bain and Company, which shows that the best divesters significantly outperformed the average company in terms of shareholder value. The paragraph concludes by discussing the pressure on conglomerates to break up due to diversification discounts and the reasons behind this, including complex financial statements, empire-building tendencies of CEOs, and the changing advantages of vertical integration and diversification due to strategic alliances and technological advancements.

05:03

💼 Methods of Corporate Restructuring: Sell-offs, Spin-offs, Carve-outs, and Split-offs

The second paragraph delves into the specifics of each restructuring method. Sell-offs are described as a straightforward way to exit businesses or assets by selling them to a buyer, with an example of Ford Motor Company selling Jaguar and Land Rover to raise cash. Spin-offs are explained as the process of making a division into a separate legal entity, with Baxter International's spin-off of Baxalta as an example. Carve-outs are partial divestitures where a portion of a business is sold to outside investors, with Dupont's carve-out and subsequent split-off of Conoco as an illustration. The paragraph also clarifies the difference between spin-offs and spin-outs, and outlines the features of each method, such as cash flow, control, and stock ownership implications. The summary concludes with a mention of Toshiba's reorganization as an example of a combination of sell-offs and spin-offs, and emphasizes the strategic importance of de-diversification to unlock value and maintain focus.

Keywords

💡Divestiture

Divestiture refers to the act of selling a subsidiary, business unit, or a portion of a company to another entity. It is a strategic move that allows a company to focus on its core business areas and can also provide financial relief. In the video, divestiture is highlighted as a crucial part of value creation, where managers should proactively consider exiting businesses that no longer align with the firm's strategic goals. An example given is the necessity for Ford Motor Company to sell Jaguar and Land Rover to raise cash during a financial crisis.

💡Sell-offs

Sell-offs involve the outright sale of a business or asset to another company. This method of restructuring is straightforward and often used to quickly raise capital. The script mentions Ford's sale of Jaguar and Land Rover to Tata Motors, which not only provided a financial boost to Ford but also allowed the brands to be managed by a company that could invest in their growth.

💡Spin-offs

A spin-off is the process of creating a new independent company from a division or subsidiary of an existing corporation. This allows the new entity to operate with greater autonomy and potentially realize a higher valuation in the market. The video script uses Baxter International's spin-off of its biopharmaceuticals business, Baxalta, as an example, where Baxter shareholders received shares in the new company, and Baxter retained a partial stake.

💡Carve-outs

Carve-outs are partial divestitures where a parent company sells a portion of a subsidiary to outside investors, often through an IPO. This strategy can establish a market value for the subsidiary and provide capital to the parent. The script refers to DuPont's carve-out of Conoco through an IPO, which later led to a split-off transaction.

💡Split-offs

A split-off is a transaction where shareholders of the parent company are given the opportunity to exchange their shares for those of the subsidiary. This can be part of a carve-out strategy, allowing shareholders to choose direct ownership in the separated business. The example from the script is DuPont's split-off of the remaining interest in Conoco, giving shareholders the choice to hold shares in the oil and gas company or keep their DuPont shares.

💡Diversification Discount

Diversification discount is a phenomenon where the market values the stock of a highly diversified company at a lower multiple relative to its earnings compared to less diversified firms. This is because investors often perceive diversified companies as more complex and harder to value. The script discusses how this has led to pressure to break up conglomerates, as their diversified business models are less attractive to investors.

💡Empire Builders

Empire builders are managers or CEOs who aggressively pursue growth and expansion for its own sake, often leading to over-diversification. The video script points out that such behavior can result in increased bureaucratic costs that outweigh the benefits of diversification, making the company less efficient and less attractive to investors.

💡Strategic Alliances

Strategic alliances refer to long-term cooperative relationships between companies, which can serve as an alternative to vertical integration. The script mentions how such alliances, along with advances in information technology, have reduced the advantages of diversification, as companies can now more easily coordinate activities without needing to own all aspects of the supply chain.

💡Dediversification

Dediversification is the process of simplifying a company's business structure by reducing the number of different industries in which it operates. The video emphasizes that a good corporate strategy should include a proactive dediversification strategy to unlock more value and keep the company focused and agile. Examples include Toshiba's reorganization into separate businesses and the sale of non-core assets.

💡Value Creation

Value creation in the context of the video refers to the process of increasing a company's value, often through strategic restructuring such as divestitures. The script highlights that proactive divestiture can lead to significant value creation for shareholders, as demonstrated by a study showing that companies that effectively divested outperformed the average company in terms of shareholder returns.

💡Conglomerates

A conglomerate is a large company that operates in multiple, often unrelated industries. The script discusses the trend of breaking up conglomerates due to the diversification discount and the changing business environment that favors focused businesses over broad diversification. Examples given include Johnson & Johnson, Toshiba, and General Electric announcing plans to break themselves up into smaller, more focused companies.

Highlights

Managers often focus on expanding the firm but overlook the importance of divesting from businesses that no longer fit the corporate strategy.

Divestiture is crucial for value creation, allowing firms to unlock higher value when a business performs better as an independent entity.

Firms tend to acquire more than they divest, which can be a mistake as it limits options and reduces potential value from divestiture.

Proactive divestiture can sharpen a corporation's focus and create more value for shareholders.

Investments in the best divesters historically outperformed the average company significantly over a 20-year period.

There's a growing pressure to break apart conglomerates due to diversification discounts in stock valuation.

Investors find highly diversified companies less attractive due to complexity, difficulty in assessing performance, and potential for empire building.

Advances in strategic management and information technology have reduced the advantages of diversification and vertical integration.

Corporations like Johnson and Johnson, Toshiba, and General Electric have announced breakups into smaller companies.

Sell-offs involve selling businesses or assets to a buyer and are a straightforward method of exiting businesses.

Spin-offs transform a division into a separate legal entity, allowing it to operate independently and trade its stock separately.

Spin-offs are not the same as spin-outs, which are initiated by employees leaving to start new ventures.

Carve-outs are partial divestitures where a business unit is sold to outside investors, resulting in cash inflow to the parent company.

Split-offs offer shareholders the opportunity to exchange some or all of their parent company shares for shares in the subsidiary.

Toshiba's reorganization in 2022 included separating into two standalone companies and selling off non-core assets.

A good corporate strategy should include a diligent and proactive dediversification strategy to unlock more value and maintain flexibility.

Dediversification can be achieved through a combination of sell-offs, spin-offs, carve-outs, and split-offs, depending on various factors.

Transcripts

hi everyone in this video we're going to

look at how managers can restructure The

Firm through sell-offs spin-offs carve

outs and split-offs let's get started

many managers invest considerable effort

and energy in assessing opportunities to

expand the scope of the firm while

overlooking a key part of a strong

corporate level strategy exiting

businesses and activities that no longer

make sense to have under joint ownership

divestiture can be important both for

upside opportunities such as when a

business can unlock higher value on the

stock as an independent company and for

adjusting downside threats such as when

assets need to be sold off to rescue The

Firm from financial crisis or capacity

needs to be reduced and Industry due to

Falling demand

there is often a strong bias against

divestiture most estimates suggest that

firms acquire three businesses for every

business that has divested this is an

unfortunate mistake as waiting until the

firm is in an emergency situation

dramatically limits the firm's options

and reduces the amount of value the firm

is likely to harvest from divestiture

instead managers should recognize the

divestiture is a crucial part of value

creation

managers that take the disciplined and

proactive approach to divestiture not

only sharpen the focus of the

corporation but also create much more

value for shareholders for example a

study by Bain and Company of 7 315

divestitures completed by 742 companies

over a 20-year period found that an

investment of one hundred dollars in the

average company in 1987 would have been

worth about a thousand dollars at the

end of 2007 but the same investment made

in a portfolio of the best divesters

would have increased in value to over

eighteen hundred dollars

in the last few decades there has been

mounting pressure to break apart

conglomerates because the stock market

has valued their stock at a

diversification discount meaning that

the stock of a highly Diversified

company is valued lower relative to its

earnings than the stock of less

Diversified companies investors see

highly Diversified companies as less

attractive Investments for four reasons

first the company might no longer have a

business model that requires being in so

many different Industries second highly

Diversified firms have complex financial

statements that make it harder to assess

their performance third many investors

have learned from experience that

managers often have a tendency to pursue

too much diversification or diversify

for the wrong reasons for example some

CEOs pursue growth for its own sake they

are Empire Builders who expand the scope

of their companies to the point where

fast increasing bureaucratic costs

become greater than the additional value

that their diversification strategy

creates and fourth Innovations in

Strategic Management have diminished the

advantages of vertical integration and

diversification for example a few

decades ago there was little

understanding of how long-term

Cooperative relationships or strategic

alliances between a company and its

suppliers could be a viable alternative

to vertical integration furthermore and

advances in Information Technology have

also made it far easier to achieve

coordination without joint ownership

under growing pressure to break up

conglomerates many corporate Giants such

as Johnson and Johnson Toshiba and

General Electric have announced they

would break themselves up into smaller

companies so how do you do it we will

cover four methods here sell-offs

spin-offs carve outs and split-offs one

of the most straightforward ways for a

firm to exit businesses or assets is to

sell them to a buyer for example in 2008

when Ford Motor Company was at risk of

bankruptcy and needed to raise cash fast

it sold Jaguar at Land Rover together to

Tata Motors for 2.3 billion dollars that

was about half of what it had paid for

the brands in 1999 and 2000 respectively

Ford also had to pay taught us 600

million to make up for shortfalls in the

two Brands pension plans meaning that

the sale only netted Ford 1.7 billion

despite the loss the sale was necessary

it not only helped to rescue Ford's

balance sheet but transferred the brands

to a company that could afford the scale

of investment that both Brands battle it

needed so some features of sell-offs

include that the parent company raises

cash in the sale the parent company

shareholders have no ownership over the

assets that are sold and the parent

company relinquishes all control over

the assets

another popular method of paring down

the scope of the firm is a spin-off a

spin-off is when a corporation makes a

division or subsidiary of the firm into

a separate legal entity spinning off a

business can give it the independence it

needs to be more successful while also

enabling its stock to trade separately

from the corporate parents stock this

can be especially important when the

spin-off is in an industry that has

better growth prospects or is more

attractive than the overall corporate

portfolio the now independent stock may

rise faster in value than the corporate

parent stock value when the spin-off

occurs owners of the shares in the

corporate parent receive shares in the

spin-off the parent company itself

however receives no cash for spending

off the division the corporation may

also choose to spin off only a portion

of the division's shares for example in

2014 Baxter International spun off its

biopharmaceuticals business buxalta

Incorporated Baxter kept a 19.5 stake in

baxalta and distributed the remaining

80.5 percent in the form of shares

distributed to Baxter shareholders

features of a spin-off include that a

parent gets no cash payment the parent

company relinquishes control over the

spun off subsidiary and the parent

company's shareholders get stopped in

the newly independent company

be careful not to confuse spin-offs with

spin outs whereas a spin-off is an

intentional divestment decision made by

managers of the corporation a spin out

is an independent decision made by

employees of the firm that decide to

leave to start a new venture

now let's talk about carve outs and

split-offs a carve out is a partial

divestiture of a business where a parent

company sells some portion of a business

unit to outside investors such as to a

strategic buyer or to the public in an

initial public offering unlike the

spin-off a carve-out results in a cash

inflow to the corporate parent sometimes

a carve out is used to establish a

market value of the subsidiary the funds

raised in a public offering provide a

market-based assessment of what the

subsidiary is worth a carve out is

sometimes followed by a split off where

shareholders in the parent company are

offered the opportunity to hold shares

in the subsidiary instead of some or all

of their shares in the parent company

that is they can trade some or all of

their shares in the parent for shares in

the subsidiary according to an exchange

ratio based on the value of the two

stocks

for example in 1998 Dupont sold off 30

percent of Conoco an oil and gas company

through an initial public offering that

raised 4.4 billion one of the largest

initial public offerings in the world at

that time and the following year Dupont

split up the remaining 70 in a split off

giving shareholders an option to take

shares in Quantico or to keep their

shares in duponts features of a carve

out include the fact that the parent

company raises cash in the partial sale

of the subsidiary the parent company

retains control over the subsidiary and

if it's a split off the parent company's

shareholders may be able to hold stocks

separately in the part of the subsidiary

that was sold off

often a plan to reorganize a major

conglomerate into separate businesses

includes a combination of sell-offs and

spin-offs for example in 2022 Toshiba

underwent a massive reorganization that

included separating into two Standalone

companies and selling off other assets

deemed non-core including its joint

venture stake and Toshiba carrier which

was sold to Carrier Group Toshiba

elevator and Building Systems and

Toshiba lighting and Technology

Corporation buyers for the latter two

businesses had not yet been identified

as of July 2022 Toshiba also said it

intended to spin off Toshiba device

company which included its semiconductor

integrated circuits and disk drive

manufacturing operations the remaining

business Toshiba infrastructure service

would include toshiba's Energy Systems

and solutions infrastructure systems and

solutions and digital Solutions and

Battery businesses

In Sum a good corporate strategy should

incorporate a diligent and proactive

dediversification strategy often selling

off assets or splitting up the firm into

multiple companies could help unlock

more value and hope the company to stay

flexible and focused sell-offs spin-offs

carve outs and split-offs are some of

the main ways firms achieve

dediversification and they are often

done in combination with each other

which one you use depends on things like

is there a buyer for the assets does the

firm need to raise cash does the firm

want to retain some control over the

subsidiary or assets and is it likely to

be beneficial that the subsidiary trade

under its own stock