Deck 16: Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs

Question 1

Equity carve-outs have some of the characteristics of both divestitures and spin-offs.

Answer 1

True

Question 2

The timing of a divestiture is important.If the business to be sold is highly cyclical,the sale should be timed to coincide with the firm's peak year earnings.

Answer 2

True

Question 3

In deciding to sell a business,a parent firm should compare the business' after-tax value in sale with its pre-tax value to the parent as part of the parent.

Answer 3

False

Question 4

Antitrust regulatory agencies may make their approval of a merger contingent on the willingness of the merger partners to divest certain businesses.

Question 5

When a parent creates a tracking stock for a subsidiary,it is giving up all control of that subsidiary.

Question 6

A spin-off is a transaction in which a parent creates a new legal subsidiary and distributes shares it owns in the subsidiary to its current shareholders as a stock dividend.

Question 7

An equity carve-out is often a prelude to a complete divestiture of a business by the parent.

Question 8

Although the parent often retains control in an equity carve-out,the shareholder base of the subsidiary may be different that that of the parent.

Question 9

Tracking stocks are often created to give investors a pure play investment opportunity in one of the parent's subsidiaries.

Question 10

Tracking stocks may create internal operating conflicts among the parent's business units in terms of how the consolidated firm's cash is allocated among its business units.

Question 11

A spin-off is a transaction involving a separate legal entity whose shares are sold to the parent firm's shareholders.

Question 12

Empirical studies show that the desire by parent firms to increase strategic focus is an important motive for exiting businesses.

Question 13

A split-up involves the creation of a new class of stock for each of the parent's operating subsidiaries,paying current shareholders a dividend of each new class of stock,and then dissolving the remaining corporate shell.

Question 14

Divestitures,spin-offs,equity carve-outs,split-ups,and bust-ups are commonly used strategies to exit businesses.

Question 15

Both a divestiture and a spin-off generally generate a cash infusion for the parent.

Question 16

In a spin-off,the proportional ownership of shares in the new legal subsidiary is the same as the stockholders' proportional ownership of shares in the parent firm.

Question 17

In an equity carve-out,the cash raised by the subsidiary in this manner may be transferred to the parent as a dividend or as an inter-company loan.

Question 18

Spin-offs are generally immediately taxable to shareholders.

Question 19

In a spin-off,the board of directors is the same as the board of directors of the parent firm.

Question 20

The parent firm generally retains control of the business involved in an equity carve-out.

Question 21

A substantial body of evidence indicates that increasing a firm's degree of diversification can improve substantially financial returns to shareholders.

Question 22

Divestitures,spin-offs,equity carve-outs,split-ups,split-offs,and bust-ups are commonly used strategies to exit businesses and to redeploy corporate assets by returning cash or noncash assets through a special dividend to shareholders.

Question 23

The decision to sell or to retain the business depends on a comparison of the pre-tax value of the business to the parent with the after-tax proceeds from the sale of the business.

Question 24

When a firm is unable to pay its liabilities as they come due,it is said to be in bankruptcy.

Question 25

Although the sale value may exceed the equity value of the business,the parent may choose to retain the business for strategic reasons.

Question 26

The divesting firm is required to recognize a gain or loss for financial reporting purposes equal to the difference between the book value of the consideration received for the divested operation and its fair value.

Question 27

Empirical studies show that exit strategies,which return cash to shareholders,tend to have a highly unfavorable impact on shareholder wealth creation.

Question 28

A parent firm's decision to sell or to retain a subsidiary is often made by comparing the after-tax equity value of the subsidiary with the pre-tax and interest sale value of the business.

Question 29

Many corporations,particularly large,highly diversified organizations,constantly are reviewing ways in which they can enhance shareholder value by changing the composition of their assets,liabilities,equity,and operations.

Question 30

A business that is rich in high-growth opportunities may be an excellent candidate for divestiture to a strategic buyer with significant cash resources and limited growth opportunities.

Question 31

Management may sell assets to fund diversification opportunities?

Question 32

Equity carve-outs are similar to divestitures and spin-offs in that they provide a cash infusion to the parent.

Question 33

A parent firm rarely chooses to divest an undervalued business and return the cash to shareholders either through a liquidating dividend or share repurchase.

Question 34

Acquiring companies often find themselves with certain assets and operations of the acquired company that do not fit their primary strategy.Such assets may be divested to fund future investments.True of False

Question 35

In a private solicitation,the parent firm may hire an investment banker or undertake on its own to identify potential buyers to be contacted.

Question 36

Divestitures always result in the parent receiving stock or debt from the buyer.

Question 37

Managing highly diverse and complex portfolios of businesses is both time consuming and distracting.This is particularly true when the businesses are in largely related industries.

Question 38

Voluntary bust-ups or liquidations by the parent firm reflect management's judgment that the sale of individual parts of the firm could realize greater value than the value created by a continuation of the combined corporation.

Question 39

In general,a voluntary bust-up or liquidation has the advantage over mergers of deferring the recognition of a gain by the stockholders of the selling company until they eventually sell the stock.

Question 40

The divestiture of a business always results in the parent receiving cash from the buyer?

Question 41

Parent firms with a high tax basis in a business may choose to spin-off the unit as a tax-free distribution to shareholders rather than sell the business and incur a substantial tax liability.

Question 42

Equity ownership changes in spin-offs,but it does not change in split-ups.

Question 43

Unlike a spin-off or carve-out,the parent retains complete ownership of the business for which it has created a tracking stock.

Question 44

The reasons for selecting a divestiture,carve-out,or spin-off strategy are basically the same.

Question 45

Parent firms often exit businesses that consistently fail to meet or exceed the parent's hurdle rate requirements.

Question 46

In an equity carve-out,minority shareholders are eliminated.

Question 47

For financial reporting purposes,the parent firm should account for the spin-off of a subsidiary's stock to its shareholders at book value with no gain or loss recognized,other than any reduction in value due to impairment.

Question 48

In either a public or private solicitation,interested parties are asked to sign confidentiality agreements after they are given access to proprietary information but before they are asked to make a bid.

Question 49

A split-up involves carving out a portion of the equity of each of the parent's operating subsidiaries and selling the shares to the public.

Question 50

Like divestitures or equity carve-outs,the spin-off generally results in an infusion of cash to the parent company.

Question 51

For financial reporting purposes,a distribution of tracking stock splits the parent firm's equity structure into separate classes of stock without a legal split-up of the firm.

Question 52

Although the parent retains control,the shareholder base of the subsidiary that has undergone an equity carve-out is unlikely to be different than that of the parent as a result of the public sale of equity.

Question 53

In a public solicitation,a firm can announce publicly that it is putting itself,a subsidiary,or a product line up for sale.Either potential buyers contact the seller or the seller actively solicits bids from potential buyers or both.

Question 54

The divesting firm is required to recognize a gain or loss for financial reporting purposes equal to the difference between the fair value of the consideration received for the divested operation and its market value.

Question 55

A disadvantage of a split-off is that they tend to increase the pressure on the spun-off firm's share price,because shareholders who exchange their stock are more likely to sell the new stock.

Question 56

In a spin-off,some shareholders receive proportionately more shares than others.

Question 57

Restructuring actions may provide tax benefits that cannot be realized without undertaking a restructuring of the business.

Question 58

In addition,stock-based incentive programs to attract and retain key managers can be implemented for each operation with its own tracking stock.

Question 59

Split-ups and spin-offs generally are taxable to shareholders.

Question 60

A spin-off is tax free to the shareholders if it is properly structured.In contrast,the cash proceeds from an outright sale may be taxable to the parent to the extent a gain is realized.

Question 61

Which of the following is not a characteristic of a spin-off?

A) The parent creates a new legal subsidiary for the business to be spun-off
B) The shares of the new subsidiary are sold to the public
C) The ownership of shares in the new legal subsidiary is the same as the stockholders' proportional ownership of shares in the parent firm
D) The new business once spun-off has its own management and board
E) Spin-offs are generally not taxable to the parent's shareholders if properly structured

Question 62

The board of directors of a firm approves an exchange offer in which their shareholders are offered stock in one of the firm's subsidiaries in exchange for their holdings of parent company stock.This offer is best described as a

A) Split-up
B) Split-off
C) Equity carve-out
D) Spin-off
E) Tender offer

Question 63

Which one of the following is generally not a reason for issuing tracking stocks?

A) To give investors a "pure play" in a specific business owned by the parent
B) To create a currency for the business to acquire other firms
C) To enhance the likelihood that the business will be acquired
D) To create an incentive for management receiving the stock
E) To raise capital for the parent or for the business for which the tracking stock is created

Question 64

Which of the following is a common problem associated with tracking stocks?

A) Tracking stocks often de-motivate managers of the business for which the stock is created
B) Such stocks are too complicated for investors to understand
C) Tracking stocks may create internal operating conflicts among the parent's business units
D) Such stocks often create huge tax liabilities for the parent
E) None of the above

Question 65

The board of directors of a large conglomerate has decided that the investment opportunities for the firm are limited and that greater value could be created for the shareholders if the firm were divided into four independent businesses.Following approval by shareholders,the firm executed this strategy which is best described as a

A) Split-up
B) Split-off
C) Spin-off
D) Equity carveout
E) Reverse merger

Question 66

Which of the following is true about a voluntary bust-up?

A) Parent ceases to exist
B) Cash infusion to the parent
C) Parent stock is exchanged for subsidiary stock
D) New shares issued to the public
E) Parent remains in control

Question 67

An equity carve-out differs from a spin-off for all but which one of the following reasons?

A) Generates a cash infusion into the parent
B) Is undertaken when the unit has very little synergy with the parent
C) The proceeds often are taxable to the parent
D) Continues to be influenced by the parent's management and board
E) The carve-out's shareholders may differ from those of the parent's shareholders

Question 68

For a spin-off to be tax-free to the shareholder it must satisfy which of the following:

A) The parent firm must have a controlling interest in the subsidiary before it is spun off.
B) After the spin-off, both the parent and the subsidiary must remain in the same line of business in which each was involved for at least 5 years before the spin-off.
C) The spin-off cannot have been used as a means of avoiding dividend taxation by converting ordinary income into capital gains.
D) The parent's shareholders must maintain significant ownership in both the parent and the subsidiary following the transactions.
E) All of the above

Question 69

A spin-off may create shareholder wealth for all of the following reasons except for

A) Spin-offs are generally not taxable if properly structured
B) The spin-off's management and board is independent of the former parent
C) Investors will be better able to value the spin-off
D) The cost of capital of the spin-off is generally higher than when it was part of the parent
E) The spin-off may be subsequently acquired by another firm

Question 70

To decide if a business is worth more to the shareholder if sold,the parent firm generally considers all of the following factors except for

A) The after-tax cash flows of the business to be sold
B) The after-tax sale value of the business to be sold
C) The parent's cost of capital
D) A and B
E) A, B, and C

Question 71

A firm decides to distribute all of the shares it holds in a subsidiary to its shareholders.The distribution would be called a

A) Divestiture
B) Split-up
C) Spin-off
D) Split-up
E) Equity carveout

Question 72

An equity carve-out by a parent of one of its subsidiaries is often a precursor to a

A) Complete divestiture or spin-off of the subsidiary
B) An acquisition
C) A merger
D) Joint venture
E) The creation of a tracking stock

Question 73

Which of the following is not true of a divestiture?

A) May create cash infusion for the parent firm
B) Parent ceases to exist
C) Proceeds of sale taxable if returned to shareholders through a dividend or stock buyback
D) A new legal subsidiary may be created
E) B and C

Question 74

A diversified automotive parts supplier has decided to sell its valve manufacturing business.This sale is referred to as a

A) Merger
B) Divestiture
C) Spin-off
D) Equity carveout
E) Liquidation

Question 75

Which of the following is generally considered a motive for exiting businesses?

A) Changing corporate strategy or focus
B) Underperforming businesses
C) Regulatory concerns
D) Lack of fit
E) All of the above

Question 76

As part of its restructuring plan,a holding company plans to undertake an IPO for 35 percent of the shares it owns in a subsidiary.The sale of these shares would be called a

A) Divestiture
B) Split-off
C) Split-up
D) Equity carveout
E) Breakup

Question 77

Which of the following is generally not considered a common motive for exiting businesses?

A) Changing strategy or focus
B) Desire to achieve economies of scale
C) Lack of fit with the parent's other businesses
D) Discarding unwanted businesses from prior acquisitions
E) All of the above

Question 78

Which of the following is not true of a split-off?

A) A split-off is a variation of a spin-off
B) Parent company shareholders receive shares in a subsidiary in return for surrendering their parent company shares
C) Split-offs are best suited for disposing of a less than 100 percent investment stake in a subsidiary,
D) A split-off reduces the parent firm's earnings per share.
E) The split-off reduces the pressure on the spun-off firm's share price

Question 79

Which of the following is not true of an equity carve-out?

A) Creates cash infusion for the parent
B) Change in equity ownership of the unit involved in the carve-out
C) New shares issued to the public
D) Taxable if proceeds returned to shareholders through a dividend or stock buyback
E) Parent ceases to exist

Question 80

Which of the following is not true of a spin-off?

A) Creates cash infusion for parent
B) Change in equity ownership of the spin-off
C) New legal entity created
D) New shares issued to the public
E) A, B, and D