Restructuring the corporation through sell-offs, spin-offs, carve-outs and split-offs
Summary
TLDRThis 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- 🏢 Reasons for conglomerates to break up include outdated business models, complex financials, over-diversification, and the diminishing advantages of vertical integration.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
🔄 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.
💼 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.
Mindmap
Keywords
💡Divestiture
💡Sell-offs
💡Spin-offs
💡Carve-outs
💡Split-offs
💡Diversification Discount
💡Empire Builders
💡Strategic Alliances
💡Dediversification
💡Value Creation
💡Conglomerates
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
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