American Cyanamid’s
Cytec’s Spin-Off
Ron Bangco
Frank Abrao
Katie O’Neal
Christina Natale
Agenda:
The Chemical Division Spin-off into
Cytec Industries
History of American Cyanamid
•Founded in 1907 as a manufacturer of fertilizer, calcium cyanamide
•In the 40’s and 50’s, they strengthened their position in medical
products
•Lost market share in its consumer products division in the 60’s and
70’s
•In the 80’s Cyanamide focused on its core businesses (life sciences)
•Sell or spin-off unrelated or poorly performing assets
•90’s, Cyanamid initiated asset sales of some of its consumer products
•90’s, Prior to spin-off sold some of its chemical business without their
liabilities
Chemical Division (Cytec)
1990 - Chemical businesses generated 25% of sales,
posted $171.5 million loss
1991 - Chemical division generated 23% of sales with only
5% earnings
1991 - Chemicals division’s made a separate,
unincorporated business unit called Cytec Industries
1993 - Cytec officially spun off Cyanamid
- Cytec (chemical division) held unrelated businesses
- Held liabilities of previously sold businesses
Net Income of American Cyanamid's
Division
100%
80%
60%
40%
20%
0%
-20%
-40%
1988
Medical
1989
Agriculture
1990
Chemicals
1991
1992
Consumer Products
Chemical Division (Cytec's) Sales and
Net Income (in millions)
1993
1992
1991
1990
1989
1988
-1000
-500
0
Net Income
500
Sales
1000
1500
Advantages to Cyanamid
•Focused on core competency
•Reduce liabilities
•Environmental
•Retiree Health Care
•Life Insurance
•Pension
•Dividend’s of $14.6 million per year
Divestiture options on chemical
division (Cytec Industries)?
•Asset Sale
•Equity Carve Out
•Spin-Off
Asset Sale
•Subsidiary is sold to a third party
•No new firm is created
•No effect to rivals
Pros
Receives Cash
Creates value to
shareholders of parent
firm
Cons
Tax Implications – Tax
on sale
AI – stock is overvalued
Equity Carve Out
•Parent firm issues equity of a subsidiary
•Parent firm receives cash
•New firm is created
•Subsidiary
•Substitute to equity financing
•Buyers of new stock become shareholders of the
subsidiary firm
•Parent Firm usually maintains a controlling interest
in the new firm
Equity Carve Out
Pros
Creates value to
shareholders of parent
firm
Incentives for
management
Greater monitoring
AI – signaling parent
firm undervalue
Cons
Tax Implications – Tax
on sale
AI – subsidiary stock is
overvalued
Transaction Cost
Spin-Off
•Equity issuance
•New firm is created
•Parent firm does not receive cash in transaction
•New shares distributed to existing shareholders as a
pro rata dividend
•Shareholders of the new independent firm are
the same share holders as the shareholders of the
parent firm
•Tax free transactions
•Distributes minimum 80% of the shares for the
subsidiary
Spin-Off
Pros
Creates value to
shareholders of parent
firm
Greater monitoring
Positive information on
subsidiary
Cons
Rivals of Spin-off
experience positive
return
How is Value Added?
•Better Management of new independent carved
out firm (Equity Carve Out and Spin-Off)
•Easier to set up incentive based contracts
•Publicly traded equity
•Compensated on stock performance
•Greater monitoring and information production
about the new firm
•Analysts, Credit Ratings…
Equity Structure
•Cytec issued approx. 12.8 million shares of
common stock pro rata to Cyanamid shareholders
•7 shares of ACY received 1 share of CYT
•Cytec issued preferred stock to Cyanamid with
aggregate face value of $200 million
•Three tranches
•Tax implications
•Gave up tax advantage to retain more control
Three Tranches
•Series A
•Annual cash dividend, 15 year life, transferable and
redeemable after 4 years, in full after 6 years
•Series B
•Annual cash dividend, 15 year life, transferable,
convertible to 30% of Cytec stock
*Covenant for Series A and B: missed dividend payment
of 6 or more, entitles the right to elect 2 directors
•Series C
•Annual cash dividend, perpetual life, restricted
covenants, non-transferable, entitles election of 1
director
Calculating Value
Announcement Date at close
February 23
Closing Price
February 22
February 24
$47.00
$49.25
Change
4.8% increase in
value
Standing Behind Our Decision
Ron Bangco
Frank Abrao
Katie O’Neal
Christina Natale
Q&A