Transcript Shearman & Sterling - NYU Stern

Corporate Break-Ups
Prof. Ian Giddy
New York University
Mergers, Acquisitions & Divestitures
 Mergers
& Acquisitions
 Divestitures
 Valuation
Concept: Is a division or firm worth more
within the company, or outside it?
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 2
Breaking Up




Why—The business may be worth more
outside the company than within
How—Sell to another company, or to the
public, or give it to existing shareholders
Tax Aspects—As a rule if you get paid in cash
you realize a taxable gain; not otherwise
Effect on Shareholders—The bigger the part
sold off, the greater the percentage gain
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 3
Case Study: Pinault-Printemps-Redoute




Copyright ©2002 Ian H. Giddy
Why?
How?
Tax Aspects?
Effect on Shareholders?
Corporate Financial Restructuring 4
Why Break Up?
Pro-active
 Defensive
 Involuntary
Examples of each?

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 5
Why Break Up?
Pro-active (GM tracking/selling DirectTV)
 Defensive (ABB selling ABB Cap Lease)
 Involuntary (ATT breakup, Enron)
Examples of each?

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 6
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

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 7
Tax Consequences
The spin-off and related techniques have
the 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
years
The subsidiary must be at least 80% owned
by the parent
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 8
Breaking Up
Breaking up
Tax-Free
Spin-Off
Copyright ©2002 Ian H. Giddy
Split-Up
Taxable
Tracking Stock
Divestiture
Equity Carve-Out
Split-Off IPO
Bust-Up
Corporate Financial Restructuring 9
Tax-Free Breakups
Spin-Off




Tax-Free
Split-Up
Tracking Stock
Spin-offs—pro-rata distribution by a company of all
its shares in a subsidiary to all its own shareholders
Split-offs—some parent-company shareholders
receive the subsidiary's shares in return for their
shares in the parent
Split-ups—all of the parent company's subsidiaries
are spun off and the parent company ceases to exist
Tracking Stock—special stock issued as dividend:
pays a dividend based on the performance of a
wholly-owned division
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 10
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
corporation
 ability of the market to more accurately value the
respective businesses of the issuer

What does it really add?
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 11
Taxable Breakups
Taxable
Divestiture


Equity Carve-Out
Split-Off IPO
Bust-Up
Divestitures—the sale of a division of the
company to a third party
Equity carve-outs—some of a subsidiary‘s
shares are offered for sale to the general
public
 Split-off
IPOs—a private company offers a part
of the company to the public

Bust-ups—voluntary liquidation of all of the
company’s business
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 12
Divestitures Can Add Value

Shareholders of the selling firm seem to
gain, depending on the fraction sold:
% of firm sold
0-10%
10-50%
50%+
Copyright ©2002 Ian H. Giddy
Announcement effect
0
+2.5%
+8%
Corporate Financial Restructuring 13
Divestitures 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 sub – standalone value
 Value of sub – acquisition value to
another company

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 14
Break-up Computation
PPR with Finaref PPR without Finaref Finaref Standalone Finaref with CA
EBITDA
€ 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
€ 3,555
Additional Gains/losses
€ 1,187
€0
-€ 1,400
Choice
€ 9,538
€ 11,114
€ 10,155
Source: breakup.xls
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 15
Framework for Assessing
Restructuring Opportunities
Current market
overpricing or
underpricng
Current
Market
Value
1
Company’s
DCF value 2
5
Restructuring
Framework
Operating
improvements
Total
restructured
value
Financial
structure
improvements
(Eg Increase D/E)
4
3
Potential
value with
internal
improvements
Copyright ©2002 Ian H. Giddy
Maximum
restructuring
opportunity
Disposal/
Acquisition
opportunities
Potential
value with
internal
+ external
improvements
Corporate Financial Restructuring 16
Using The Restructuring Framework
($ Millions of Value)
$1,000
$ 25
Current
perceptions
Gap: “Premium”
$ 975
$ 300
Company
value as is
Current
Market
Price
1
2
$ 635
Maximum
restructuring
opportunity
5
Restructuring
Framework
Strategic
and operating
opportunities
Potential
value with
internal
improvements
Financial
engineering
opportunities
4
3
Disposal/
Acquisition
opportunities
$ 1,275
Optimal
restructured
value
$ 1,635
$ 10
Eg Increase D/E
Potential
value with
internal
and external
improvements
$ 1,625
$ 350
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 17
Marriott
The Choice
 the decision of whether to split Marriott
Corp. into two companies--Marriott
International and Host Marriott
The Situation
 decline in real estate values
 has a significant percentage of assets
in hotels it had planned to sell
 difficult for Marriott to pursue growth
strategies
 market price of the company had
declined significantly
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 18
Marriott: Assignment





Will this type of reorganization
meaningfully improve the company?
What are the different way of effecting
break-ups? In the Marriott case, are there
reasonable alternative approaches?
Draw up a spreadsheet comparing the
before-and-after capital structure of
Marriott and its proposed component parts
How are bondholders affected? How can
they protect their interests?
Make a recommendation, and justify it.
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 19
Marriott: Project Chariot
Marriott Corp.
Marriott Intl.
Host Marriott Corp.

Intangibles

Hotels

Franchises


Management
Services
Airport and
Road Plazas

Land

Distribution
Services

Timeshares
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 20
Marriott: Breaking Up
Breaking up
Tax-Free
Spin-Off
Copyright ©2002 Ian H. Giddy
Split-Up
Taxable
Tracking Stock
Divestiture
Equity Carve-Out
Split-Off IPO
Bust-Up
Corporate Financial Restructuring 21
Marriott: Financial Restructuring
Marriott Corp. Marriott Intl
Host Marriott
Long-term debt
2732
378
2362
LYONs
228
205.2
22.8
Convertible preferred
200
200
Shareholders' equity
585
524
61
Total long-term capital
3745
1107.2
2645.8
Long-term debt/Total
Copyright ©2002 Ian H. Giddy
73%
34%
89%
Corporate Financial Restructuring 22
Corporate Restructuring
Divestiture—a reverse acquisition—is
evidence that "bigger is not necessarily
better"
 Going private—the reverse of an IPO
(initial public offering)—contradicts the
view that publicly held corporations are
the most efficient vehicles to organize
investment.

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 23
Contact Info
Ian H. Giddy
NYU Stern School of Business
Tel 212-998-0426; Fax 212-995-4233
[email protected]
http://giddy.org
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 27