IN THE NAME OF ALLAH

THE MOST BENEFICIAL AND THE MOST MERCIFUL

 Group
• Ayesha Ahmed
• Muneeba yousaf
• Iqra yaseen
• Asmara Fatima
• Iqra Saeed
• Faryal Zafar
Corporate Re
Structuring
 Corporate Restructuring
The process involved in changing the organization of a
business. Corporate restructuring can involve making
dramatic changes to a business by cutting out or
merging departments that often has the effect of
displacing staff members.
 Forms of Corporate Restructuring
• Divestitures
• Equity Carve-Outs
• Spinoffs
• Splitoffs
• Exchange Offer
• Splitups
• Divestiture:
A sale of a portion of the firm to an outside party. The
selling firm is usually paid in cash, marketable securities, or
a combination of two.

• Equity Carve-Outs:
Diluting the ownership rights of original or existing
stockholders (shareholders)by issuing new common stock
(ordinary shares) of a firm to new investors.
• Spinoffs:
New shares are issued, but here they are
distributed to stockholders on a pro-rata basis. As a
result of the proportional distribution of shares,
the stockholder base in the new company is the
same as that of the old company.
• Splitoff:
Reorganizing an existing corporate structure in which the stock of a business
division, subsidiary or newly affiliated company is transferred to the
stockholders of the parent company in exchange for stock in the latter
• Exchange Offer:
New shares in a subsidiary are issued and shareholders in the parent
company are given the option to either hold on to their shares or exchange
these shares for an equity interest in the newly publicly held subsidiary.
• Splitup:
A splitup occurs when the entire firm is broken up and shareholders
exchange their shares in the parent company according to a predetermined
formula.
 Divestiture
• Disposition or sale of an asset by a company. A
company will often divest an asset which is
not performing well, which is not vital to
the company's core business, or which
is worth more to a potential buyer or as a
separate entity than as part of the company.
 Divestiture (Cont.)
• Involuntary Divestitures
An involuntary divestiture may occur when a company
receives an unfavorable review by the Justice Department
or the Federal Trade Commission (FTC), requiring the
company to divest itself of a particular division.
• Voluntary Divestitures
  Voluntary giving up of a possession or right, which
is a common result in an antitrust action to
prevent monopoly or other restraint of trade.
 Reasons for involuntary divestitures

• Poor strategic fit of division

• Reverse synergy
• Poor performance
• Capital market factors
• Cash flow needs
• Abandoning the core business
 Poor strategic fit of division
• Voluntary divestitures more common
• Parent company move out business line/unit if
it no longer fits into its overall strategic plans
• ( not generating good financial performance)
 Reverse synergy
• Synergy: Combination of two firms.....
• Reverse synergy: means parts are worth more
seprately than they are within the parent
compny corporate structure.
• Large parent company unable to performe
efficiently.
• Smaller/division operate more efficiently to
earn high rate of return.
 Poor performance
• Nonprofitable unit may be diluting the
performance of overall company..
• Financial drain on overall company..
• Hurdle rate:minimum return that a company
will use to evaluate projects.
• Reasons of poor performance (e.g high labor
cost,unionized labor force)
• Cost of solution may be greater than return..
 Capital market factors
• Divested division has greater access to capital
market..
• Combined corporate structure might be difficult
for investors.
• Pure plays:a company that works exclusively in
single industry.
• Division facilitates clearly identification and
market segmentation.
• Fund raising easy if independent entity.
 Cash flow needs
• Selloff may produce the immediate benefits of
an infusion of cash from the sale.
• Selling of long term asset for larger payment in
short run
• Threat of bankruptcy
 Abandoning the core business
• Less reason for a divestiture
• Often motivated by management desir to
leave an area.
• Firms usually already diversified into more
profitable business and sell core business.
 Wealth Effect Of Selloffs
What is a 'Sell-Off'?
•
• "Sell-off is the rapid selling of securities such
as stocks, bonds and commodities. The
increase in supply leads to a decline in the
value of the security"
 Wealth Effect Of Selloffs
• What is a 'Sell-Off'?
• "Sell-off is the rapid selling of securities such
as stocks, bonds and commodities. The
increase in supply leads to a decline in the
value of the security"
 Early Research
• Oppenheimer(1981)
• Study 19 major spinoffs.
• Combined value of parent company>market
value of parent company.
• 440%return yeilded.
• Kudla and McInish(1983)
• Study 6major spinoffs.
• Showed positive number market reaction to the
spinoffs.
• Prononced positive reaction occurred between
15&40 weeks before the spinoff.
• Miles and Rosen field(1983)
• Study 59 spinoffs between 1963 and 1980.
• Focusing on the impact of spinoffs on the
difference between actual and predicted return.
• Positive stock price reaction was accompained by
a negative price reaction by the parent company's
bond.
 Later Research
• Later studies are carried out by
• Schipper and smith(1986)
• Cusatis
• Miles and wooldridge(1993)
• J.p.Morgan(1995,1997,2002)
 J.P.MORGAN'S spinoffs study
• Conducted series of spinoffs.
• Founded that the market rewards companies for
doing spinoffs.
• Effect of spinning off have been greater in recent
years (1998_2001) than in earlier years
(1985_1997).
• Larger the spinoof the greater the effect is.
• Smaller the spunoff entity,the greater these gains
were.
 Wealth effects of selloffs on buyers
• Wealth effects to stockholder and bondholder of
selling companies.
• Jain analyzed the shareholder wealth effects for the
buying company.
• Jain result show that selloffs are good news for both
buyers and sellers , although sellers gain more than
buyers.
 Corporate focus and spinoffs

• New shares are issued, but here they are distributed

to stockholders on a pro-rata basis. As a result of the
proportional distribution of shares, the stockholder
base in the new company is the same as that of the
old companies.
• Subsidiary becomes publicly owned corporation

• Relationship between spinoffs and corporate focus by

comparing the performance of spin offs firms.

• They found improvement in various measure of

performance ,such as return assets.
 Equity Carve out
• Diluting the ownership rights of original or existing
stockholders (shareholders) by issuing new
common stock (ordinary shares) of a firm to new
investors.
• also known as split off IPO or a partial spin off.
• When a parent company conducts an equity crave
out it may sell 100% interest.
• Many firms looks to equity crave out as a means of
reducing their exposure to a riskier line of business.
 Characteristic of equity carve out
• Equity carve-outs can be used by a firm to raise
equity funds directly related to the operation of a
particular segment or industry.
• Equity carve-outs also used as first step in spin-off
and split-ups
 Equity carve out versus public offering
• Equity carve-out 
(ECO)in which a company creates a new subsidiary and subsequently IPOs
it, while retaining management control.
• Public offering
public offering is the sale of equity shares or other financial instruments by
an organization to the public in order to raise funds for business expansion
and investment.
Public offerings of corporate securities in the U.S. must be registered with
and approved by the SEC and are normally conducted by an investment
underwriter
Equity Carve-Outs versus Spinoffs:
• A carve-out results in a • Same shareholders hold
new set of stock
shareholders. • Spinoffs donot result in
• Positive cash flow initial changes in
effects. companies cash flows.
• More expensive to • Less expensive.
implement.
 Voluntary Liquidations:
• Extreme form of corporate restructuring.
• Corporate liquidations associated with
bankruptcy.
• A company may be liquidated when all parties
recognize that continuation of the firm will not
enhance its value.
• Liquidation option works only when the firm's
stock are lower than the margin for longer time.
 Divestiture versus Voluntary liquidations:

• Single transaction in • Series of transactions in

which certain part of which all the firm's
the firm is sold. assets are sold in
• Less attractive. separate parcels.
• Subject to capital gain • Tax motives are more
taxes. attractive.
• Often be structured to
receive preferential tax
treatment.
 Tracking Stocks:
A tracking or targeted stock is an equity issue
that represents an interest in the earnings of a
division of a company.
Sometimes when a company acquires other
firms but the market price of combined entity
sell at a discount, the company may try to boost
the stock by allowing one or more divisions to
trade separately as tracking stocks.
 Sell-offs versus Tracking stocks:
• In sell-offs separate • Shareholder has a legal
legal entity is created. interest in the earnings
of a division. Holders of
tracking stocks have
voting rights in overall
company.
 Master Limited Partnerships and Selloffs:

• Master Limited Partnerships are limited

partnership in which shares are publicaly
traded.
• A Limited partnership consists of a general
partner and one or more limited partners.
• The general partner runs the business and
bears unlimited liability.
 Master Limited Partnerships and Selloffs:

• The advantage of MLP is its elimination of the corporate

layer taxation. Stockholders in a corporation are taxed
twice first at corporate level second at individual level.
MLP are not taxed as a separate business entity.
• MLP’s may involved either in spinoffs and equity carve-
outs. In Spinoffs assets are directly transferred from
parent company to MLP. In Equity carve-outs MLP raises
cash through public offering and then from that cash
they purchase the assets of the division of a company.