21: Mergers, Acquisitions and Corporate Controlits plants or business units? A company may decide to divest a unit that it feels is no longer a strategic
fit with its core business, because a unit has large capital demands that the parent feels it cannot
afford, because a multi-segment company (such as a conglomerate) is priced at a discount relative
to peer companies, or perhaps because the parent is in distress and needs to sell something to raise
cash (such as Citigroup’s June 2009 sale of its 51% stake in Smith Barney). What options are available
to a company that wants to sell or otherwise separate a division or some fraction of its assets? A
divestiture occurs when the assets and/or resources of a subsidiary or division are conveyed to another
organisation. This is quite a common trend in the Australian financial services and investment banking
landscape, where global financial institutions often divest their Australian divisions or businesses.
An example of a divestiture occurred in 2012, when CIMB Group (a Malaysian investment bank)
bought Royal Bank of Scotland’s Australian equities, mergers and acquisition advisory and equity
capital markets businesses.
An asset sale or sell-off occurs when a company sells a division, plant or machinery to new owners,
usually in exchange for cash. The receipt of cash makes this a taxable event, and the seller must pay tax
(at the corporate income tax rate) for any capital gains above the tax basis of the sold assets. Asset sales
were a key feature in the Victorian government’s privatisation of the electricity and gas industry in the
1990s. Sales of electricity assets between 1993 and 1999 generated $21.4 billion, with sales of gas assets
producing an extra $6.5 billion, all of which were used to dramatically reduce the state’s debt levels.
In a spin-off, the parent company distributes to its own shareholders a division or subsidiary
of the parent. This spun-off company is a new entity, with equity shares that are distinct from the
parent equity. Existing shareholders receive a pro rata distribution of shares in the new company.
For example, on 11 February 2009, the FCC granted approval of the separation of Time Warner
Inc. and Time Warner Cable in a spin-off. On 12 February 2009, Time Warner Cable received a
favourable IRS ruling, meaning that this spin-off, like most, was not taxable to shareholders. In
2012, News Corporation announced that it planned to spin off its Australian assets in mid-2013.
Subject to shareholder approval, the company expects to issue shares in the new company to current
shareholders in proportion to their holdings in the current company of non-voting Class A shares and
voting Class B shares.
A split-off is similar to a spin-off, in that the parent company creates a newly independent company
from a subsidiary, but ownership of the company is transferred only to certain existing shareholders in
exchange for their shares in the parent. Equity carve-outs (described more fully in Chapter 18) bring a
cash infusion to the parent from the sale of an ordinary share interest in a subsidiary through a partial
public offering to new shareholders. One key feature of an equity carve-out is that the parent company
retains some control of the decision process in the subsidiary, versus a spin-off, where the parent gives up
decision rights. (It is often the case that a carve-out precedes the ultimate spin-off of a unit.)
Split-ups and bust-ups are extreme corporate control events. As it sounds, the split-up of a corporation
is the split-up and sale of all its subsidiaries so that it ceases to exist (except possibly as a holding
company with few if any assets). A bust-up is the takeover of a company that is subsequently split up.
To decide among these various divestiture options, management will usually consider the after-tax
proceeds received by the parent company from each option, how many bidders might exist to purchase
a given unit, and whether the company’s existing shareholders are likely to hold on to, or immediately
churn (sell), the divested unit if they were to receive it in a spin-off. The ultimate decision should be
based on the desire to maximise long-run shareholder value, combined with the company’s desire to
focus its ongoing operations on business units for which it has a comparative advantage running.
divestiture
Assets and/or resources
of a subsidiary or division
are conveyed to another
organisationasset sale
Assets of one company are
sold to another organisation,
usually for cashspin-off
A parent company creates a
new company with its own
shares to form a division
or subsidiary, and existing
shareholders receive a pro
rata distribution of shares in
the new companysplit-off
A parent company creates a
new, independent company
with its own shares, and
ownership is transferred to
certain shareholders only, in
exchange for their shares in
the parent.split-up
The division and sale of all of
a company’s subsidiaries, so
that it ceases to exist
bust-up
The takeover of a company
that is subsequently split up