Chapter
11
Corporate Restructuring
and Divestitures
Corporate Restructuring Strategies
 With constantly changing competitive
environments, firms must consistently adjust
 Managers have many options to change firm
structure without taking part in a merger or
acquisition
 Corporate restructuring should occur within
the framework of the firm’s overall strategy
 No one-size-fits-all approach to corporate
decision making
Chapter 11-2
Types of Restructuring
Key methods of reorganizing assets and ownership
Type
Asset
sales
Definition
Sale of division or other
assets to another firm,
usually for cash
Equity
Public offering of partial
carve-out interest in subsidiary
creating new firm with at
least some autonomy
Spinoff
Example
Quaker sold
Snapple to Triarc
(1997)
Pharmacia
carved-out 14%
of Monsanto
(2000)
Pro rata distribution of
Sears spun off
subsidiary shares creating Dean Witter
new independent firm
Discover (1993)
Chapter 11-3
Types of Restructuring
Variations of restructuring and divestiture
Type
Split-up
Definition
Example
Separation of firm into 2+ HP dividing into
parts, often via spinoff
HP and Agilent
(1999)
Tracking Creation of new class of
AT&T offering of
stock
stock with value based on AT&T Wireless
cash flows of a division
(2000)
Exchange Distribution giving
Limited’s
offer
shareholders choice
divestiture of
between parent and
Abercombie
subsidiary stock; creates &Fitch (1998)
separate public firm
Chapter 11-4
Types of Restructuring
 Methods are sometimes used in tandem or
employed sequentially
• Equity carve-outs can be first stage of a broader
divestiture, preceding:
– Sale of remaining interest of subsidiary to
another firm
– Spinoff of remaining ownership to
shareholders
• Split-ups employ a variety of methods, usually
spinoffs
• Tracking stock may be first step of a spinoff or
exchange offer
Chapter 11-5
Restructuring Example:
 AT&T has used almost every restructuring
method in last 20 years
 1984 antitrust break up: split-up using spinoffs
• Shareholders receive 1 share of each “Baby
Bell” for ever 10 AT&T shares
Spinoff
 AT&T Capital
• 1993 $107.5 million public offering of 14%
• 1996 $2.2 billion asset sale to an investor group
Chapter 11-6
Restructuring Example:
 1995-6 Split-up
• Lucent: $3 billion carve-out in 18% IPO,
followed by spinoff (.324 shares Lucent for
each AT&T)
• NCR: spinoff (0.0625 NCR shares per AT&T)
• Universal Card: asset sale for $3.5 billion to
Citicorp Carve-out,
Spinoff
Spinoff
Asset sale
Universal Card
Chapter 11-7
Restructuring Example:
 AT&T Wireless
• Tracking stock representing 15.6% interest was
sold in IPO for $10.6 billion
• Later, exchange offer gave shareholders choice
of AT&T or AT&T Wireless stock
• Last, spinoff executed in which .32 wireless
shares were distributed to AT&T holders
 AT&T Broadband
• 10/00 – AT&T announces it will divest unit
• 7/01 – Comcast makes unsolicited bid, forcing
AT&T into an auction
• 12/01 – Comcast declared auction winner
Chapter 11-8
More Restructuring Examples
 Auto Parts Industry
• GM divested Delphi Automotive Systems
(1999) – 17.3% equity carve-out offered in
IPO, followed by a spinoff
• Ford spun off Visteon via a stock dividend
 Phillip Morris
• Restructuring to reinforce strategy of focus on
food and tobacco
• Equity carve-out of 16% of Kraft ($8.7 billion)
helped pay down debt from Nabisco acquisition
• Asset sale of Miller Brewing to South African
Breweries for $5.6 billion
Chapter 11-9
Restructuring Motives
 Many possible motives for a firm to restructure
 Direct relation between corporate strategy and
corporate restructuring
 Corporate focus often cited as restructuring
reason, but focused companies also must review
strategic alternatives in due to market changes
 Divestiture reasons: learning, reversing
mistakes, changing strategies (Weston, 1989)
 Firms restructure to remain competitive and to
respond to change forces in the economy
Chapter 11-10
Divestitures and Wealth Creation
 Modigliani, Miller, and Irrelevance
• If no transaction or information costs,
corporate organization is irrelevant
• Managers cannot improve value by
chopping firm into pieces
• Theory frames analysis of information
and transactions costs and other factors
Chapter 11-11
Divestitures and Wealth Creation
Research
Theory
Paper
Incentives, Alchian &
Monitoring Demsetz;
Costs
Jensen &
Meckling
Information, Myers &
Signaling
Majluf;
Nanda
Transaction Coase;
Costs
Williamson;
Klein et al
Year
1972;
1976
1984;
1991
1937;
1975;
1978
Concept of
Restructuring
Improves
monitoring
function of corp.
governance
May signal
information known
only to managers
Response to
changes in
transaction costs
Chapter 11-12
Restructuring and Transaction
Costs: Petrochemical Industry
 Study of transaction cost uncertainty on
vertical integration (Fan, 1996, 2000)
 Impact of uncertain oil prices:
• Before 1973 OPEC oil embargo, 13% of
sample firms owned oil and gas assets
• After embargo, fraction increased to over 50%
• By 1992, fraction reverted back to 26%
• Consolidation due to energy contracts being
difficult to write and to enforce (higher
transaction costs)
 Example: Dupont (chemicals) bought Conoco
(oil) in 1981; divested in carve-out and
exchange offer in 1998-9
Chapter 11-13
Restructuring and Change Forces:
The Natural Gas Industry
 Change forces transformed industry over
course of 100 years
 Early 1900s – production close to consumers
 1920s – gas discoveries in southwest required
construction of pipelines – vertical integration
between production and transmission
 1930s – price regulation, and legislation
requiring separation of production and
transmission– caused decline in vertical
integration
 Current landscape – changing regulation has
encouraged mergers and divestitures
Chapter 11-14