Summary
business. The reasons for doing this might include a desire to give the spun-off busi-
ness its own distinct corporate identity, or a desire to avoid a takeover attempt on
the whole business. The value of the spun-off portion may have been underestimated
as part of the value of the original business, except perhaps by a potential predator. By
spinning off a particularly valuable part of the business, the market will have the
opportunity to assess that part as a separate unit. This may make it unattractive to
predators. This point implies a lack of belief in the efficiency of the capital market.
In May 2008, the confectionery and drinks business Cadbury Schweppes plcspun
off its US drinks subsidiary Dr Pepper Snapple Group Inc. Cadbury Schweppes share-
holders retained their original shares but were given shares in the spun-off business
as well. The shares in Dr Pepper were issued in proportion to the number of Cadbury
Schweppes shares each shareholder held at the time of the spin-off. The Dr Pepper
shares are now listed on the New York Stock Exchange. Cadbury Schweppes itself
holds none of the shares in the spun-off business.Mergers (takeovers)
lMerger =buying sufficient shares in another business to control it.
lIt is an alternative to organic growth (organic growth is where the business
expands through new, internally generated, projects).
lMergers assessed by bidder business and target shareholders on NPV prin-
ciples, logically from a shareholder wealth perspective.
lReasons for mergers:
lElimination or reduction of competition.
lSafeguarding sources of supply or sales outlets.
lAccess to economies of scale.
lAccess to an underutilised asset.
lSpreading risk through diversification.
lSynergy (‘2 + 2 =5’).
lFinancing merger – needs to be acceptable to bidder and appealing to target
shareholders.
lCash – gives the recipient options; may have tax ramifications for recipient.
lShares – can be popular with target shareholders, but control of bidder is
diluted; also has gearing ramifications for bidder.
lLoan notes – may not be popular with investors who currently owns equit-
ies; also has gearing ramifications for bidder.
lThe success of mergers is mixed; recent ones have tended to be less successful.Divestment
lDivestment =a business parting with some aspect of itself to:
lconcentrate on ‘core activities’;
lrid itself of a troublesome investment;
lraise cash.Summary
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