Bristol-Myers Squibb Splits Off Rest of Mead Johnson
Facing the loss of patent protection for its blockbuster drug Plavix, a blood thinner, in 2012, Bristol-Myers Squibb Company decided to split off its 83% ownership stake in Mead Johnson Nutrition Company in late 2009 through an offer to its shareholders to exchange their Bristol-Myers shares for Mead Johnson shares. The decision was part of a longer-term restructuring strategy that included the sale of assets to raise money for acquisitions of biotechnology drug companies and the elimination of jobs to reduce annual operating expenses by $2.5 billion by the end of 2012.
Bristol-Myers anticipated a significant decline in operating profit following the loss of patent protection as increased competition from lower-priced generics would force sizeable reductions in the price of Plavix. Furthermore, Bristol-Myers considered Mead Johnson, a baby formula manufacturer, as a noncore business that was pursuing a focus on biotechnology drugs. Bristol-Myers shareholders greeted the announcement positively, with the firm's shares showing the largest one-day increase in eight months.
In the exchange offer, Bristol-Myers shareholders were able to exchange some, none, or all of their shares of Bristol-Myers common stock for shares of Mead Johnson common stock at a discount. The discount was intended to provide an incentive for Bristol-Myers shareholders to tender their shares. Also, the rapid appreciation of the Mead Johnson shares in the months leading up to the announced split-off suggested that these shares could have attractive long-term appreciation potential.
While the transaction did not provide any cash directly to the firm, it did indirectly augment Bristol-Myer's operating cash flow by $214 million annually. This represented the difference between the $350 million that Bristol-Myers paid in dividends to Mead Johnson shareholders and the $136 million it received in dividends from Mead Johnson each year. By reducing the number of Bristol-Myers shares outstanding, the transaction also improved Bristol-Myers' earnings per share by 4% in 2011. Finally, by splitting-off a noncore business, Bristol-Myers was increasing its attractiveness to investors interested in a "pure play" in biotechnology pharmaceuticals.
The exchange was tax free to Bristol-Myers shareholders participating in the exchange offer, who also stood to gain if the now independent Mead Johnson Corporation were acquired at a later date. The newly independent Mead Johnson had a poison pill in place to discourage any takeover within six months to a year following the split-off. The tax-free status of the transaction could have been disallowed by the IRS if the transaction were viewed as a "disguised sale" intended to allow Bristol-Myers to avoid paying taxes on gains incurred if it had chosen to sell Mead Johnson.
Case Study Short Essay Examination Questions:
British Petroleum Sells Oil and Gas Assets to Apache Corporation
In the months that followed the oil spill in the Gulf of Mexico, British Petroleum agreed to create a $20 billion fund to help cover the damages and cleanup costs associated with the spill. The firm had agreed to contribute $5 billion to the fund before the end of 2010. To help meet this obligation and to help finance the more than $4 billion already spent on the spill, the firm announced on July 20, 2010, that it had reached an agreement to sell Apache Corporation its oil and gas fields in Texas and southeast New Mexico worth $3.1 billion; gas fields in Western Canada for $3.25 billion; and oil and gas properties in Egypt for $650 million. All of these properties had been in production for years, and their output rates were declining.
Apache is a Houston, Texas-based independent oil and gas exploration firm with a reputation for being able to extract additional oil and gas from older properties. Also, Apache had operations near each of the BP properties, enabling them to take control of the acquired assets with existing personnel.
In what appears to have been a premature move, Apache agreed to acquire Mariner Energy and Devon Energy's offshore assets in the Gulf of Mexico for a total of $3.75 billion just days before the BP oil rig explosion in the Gulf. The acquisitions made Apache a major player in the Gulf just weeks before the United States banned temporarily deep-water drilling exploration in federal waters.
The announcement of the sale of these properties came as a surprise because BP had been rumored to be attempting to sell its stake in the oil fields of Prudhoe Bay, Alaska. The sale had been expected to fetch as much as $10 billion. The sale failed to materialize because of lingering concerns that BP might at some point seek bankruptcy protection and because the firm's creditors could seek to reverse an out-of-court asset sale as a fraudulent conveyance of assets. Fraudulent conveyance refers to the illegal transfer of assets to another party in order to defer, hinder, or defraud creditors. Under U.S. bankruptcy laws, courts might order that any asset sold by a company in distress, such as BP, must be encumbered with some of the liabilities of the seller if it can be shown that the distressed firm undertook the sale with the full knowledge that it would be filing for bankruptcy protection at a later date.
Ideally, buyers would like to purchase assets "free and clear" of the environmental liabilities associated with the Gulf oil spill. Consequently, a buyer of BP assets would have to incorporate such risks in determining the purchase price for such assets. In some instances, buyers will buy assets only after the seller has gone through the bankruptcy process in order to limit fraudulent conveyance risks.
Discussion Questions
1. In what sense were the BP properties strategically more valuable to Apache than to British Petroleum?
2. How could Apache have protected itself from risks that they might be required at some point in the future to be liable
for some portion of the BP Gulf-related liabilities? What are some of the ways Apache could have estimated the potential costs of such liabilities? Be specific.
Case Study Short Essay Examination Questions:
Anatomy of a Spin-Off
On October 18, 2006, Verizon Communication's board of directors declared a dividend to the firm's shareholders consisting of shares in a company comprising the firm's domestic print and Internet yellow pages directories publishing operations (Idearc Inc.). The dividend consisted of 1 share of Idearc stock for every 20 shares of Verizon common stock. Idearc shares were valued at $34.47 per share. On the dividend payment date, Verizon shares were valued at $36.42 per share. The 1-to-20 ratio constituted a 4.73% yield-that is, $34.47/ ($36.42 × 20)-approximately equal to Verizon's then current cash dividend yield.
Because of the spin-off, Verizon would contribute to Idearc all its ownership interest in Idearc Information Services and other assets, liabilities, businesses, and employees currently employed in these operations. In exchange for the contribution, Idearc would issue to Verizon shares of Idearc common stock to be distributed to Verizon shareholders. In addition, Idearc would issue senior unsecured notes to Verizon in an amount approximately equal to the $9 billion in debt that Verizon incurred in financing Idearc's operations historically. Idearc would also transfer $2.5 billion in excess cash to Verizon. Verizon believed it owned such cash balances, since they were generated while Idearc was part of the parent.
Verizon announced that the spin-off would enable the parent and Idearc to focus on their core businesses, which may facilitate expansion and growth of each firm. The spin-off would also allow each company to determine its own capital structure, enable Idearc to pursue an acquisition strategy using its own stock, and permit Idearc to enhance its equity-based compensation programs offered to its employees. Because of the spin-off, Idearc would become an independent public company. Moreover, no vote of Verizon shareholders was required to approve the spin-off, since it constitutes the payment of a dividend permissible by the board of directors according to the bylaws of the firm. Finally, Verizon shareholders have no appraisal rights in connection with the spin-off.
In late 2009, Idearc entered Chapter 11 bankruptcy because it was unable to meet its outstanding debt obligations. In September 2010, a trustee for Idearc's creditors filed a lawsuit against Verizon, alleging that the firm breached its fiduciary responsibility by knowingly spinning off a business that was not financially viable. The lawsuit further contends that Verizon benefitted from the spin-off at the expense of the creditors by transferring $9 billion in debt from its books to Idearc and receiving $2.5 billion in cash from Idearc.
Discussion Questions
1. How do you believe the Idearc shares were valued for purposes of the spin-off? Be specific.
2. Do you believe that it is fair for Idearc to repay a portion of the debt incurred by Verizon relating to Idearc's operations even though Verizon included Idearc's earnings in its consolidated income statement? Is the transfer of excess cash to the parent fair? Explain your answer.
3. Do you believe shareholders should have the right to approve a spin-off? Explain your answer?
4. To what extent do you believe that Verizon's activities could be viewed as fraudulent? Explain your answer.
Case Study Short Essay Examination Questions:
Anatomy of a Split-Off: Bristol-Myers Squibb
Under the Bristol-Myers Squibb exchange offer of Mead Johnson shares for shares of its common stock, announced on November 16, 2009, each BMS shareholder would receive $1.11 for each $1 of BMS stock tendered and accepted in the exchange offer. The exchange was subject to an upper limit of 0.6027 shares of MJ common stock per share of BMS common.
On December 4, 2009, BMS amended the offer by increasing the maximum share exchange ratio to 0.6313, indicating it would accept for exchange a maximum of 269,281,601 shares of its stock and that if the exchange offer were oversubscribed, all shares tendered would be subject to proration. The proration formula was be determined by dividing the maximum number of MJ shares BMS was willing to exchange by the number of BMS shares actually tendered.
The actual ratio at which shares of Bristol-Myers common stock and shares of Mead Johnson common stock were exchanged was determined by computing a simple three-day average of the shares of the two firms during December 8-10, 2009, subject to the 0.6313 upper limit. On December 16, 2009, Bristol-Myers announced it would exchange up to 170 million share of Mead Johnson common stock (i.e., all that it owned) for outstanding shares of its stock at an exchange ratio of 0.6313 shares of Mead Johnson common stock for each share of Bristol-Myers common stock tendered and accepted in the exchange offer.
Assuming that the three-day average of BMS and MJ share prices was $24.30 and $43.75, respectively, BMS shareholders whose tendered shares were accepted in the exchange offer received the higher of $26.97 (i.e., $24.30 × 1.11) or $27.62 (i.e., 0.6313 × $43.75). Therefore, a BMS shareholder tendering 100 shares of BMS stock would have received the share equivalent of $2,762 ($27.62 × 100) or 63.13 MJ shares at $43.75 per shares (i.e., $2,762 ÷ $43.75). Fractional shares were paid in cash.
The actual number of BMS shares tendered totaled 500,547,697, resulting in a proration ratio of 53.80% (i.e., 269,281,601 ÷ 500,547,697). Each shareholder tendering BMS shares would only have 53.80% of their tendered shares accepted for the exchange.
Discussion Questions:
1. Why did Bristol-Myers Squibb offer its shareholders $1.11 worth of Mead Johnson stock for each $1 of Bristol-Myers Squibb stock tendered and accepted in the exchange offer?
2. Why did Bristol-Myers Squibb prorate the number of shares tendered in the exchange offer?
Case Study Short Essay Examination Questions:
Inside M&A. Financial Services Firms Streamline their Operations
During 2005 and 2006, a wave of big financial services firms announced their intentions to spin-off operations that did not seem to fit strategically with their core business. In addition to realigning their strategies, the parent firms noted the favorable tax consequences of a spin-off, the potential improvement in the parent's financial returns, the elimination of conflicts with customers, and the removal of what, for some, had become a management distraction.
American Express announced plans in early 2005 to jettison its financial advisory business through a tax-free spin-off to its shareholders. The firm also noted that it would incur significant restructuring-related expenses just before the spin-off. Such one-time write-offs by the parent are sometimes necessary to "clean up" the balance sheet of the unit to be spun off and unburden the newly formed company's earnings performance. American Express anticipated substantial improvement in future financial returns on assets as it will be eliminating more than $410 billion in assets from its balance sheet that had been generating relatively meager earnings.
Investment bank Morgan Stanley announced in mid-2005 its intent to spin-off its Discover Credit Card operation. While Discover Card generated about one fifth of the firm's pretax profits, Morgan Stanley had been unable to realize significant synergies with its other operations. The move represented an attempt by senior Morgan Stanley management to mute shareholder criticism of the company's lackluster stock performance due to what many viewed had been the firm's excessive diversification.
Similarly, J.P. Morgan Chase announced plans in 2006 to spin off its $13 billion private equity fund, J.P. Morgan Partners. The bank would invest up to $1 billion in a new fund J.P. Morgan Partners plans to open as a successor to the current Global Fund. Because the bank's ownership position would be less than 25 percent, it would be classified as a passive partner. The expectation is that, by jettisoning this operation, the bank would be able to reduce earnings volatility and decrease competition between the bank and large customers when making investments.
-In what ways might the spin-offs harm parent firm shareholders?

Question

Bristol-Myers Squibb Splits Off Rest of Mead Johnson
Facing the loss of patent protection for its blockbuster drug Plavix, a blood thinner, in 2012, Bristol-Myers Squibb Company decided to split off its 83% ownership stake in Mead Johnson Nutrition Company in late 2009 through an offer to its shareholders to exchange their Bristol-Myers shares for Mead Johnson shares. The decision was part of a longer-term restructuring strategy that included the sale of assets to raise money for acquisitions of biotechnology drug companies and the elimination of jobs to reduce annual operating expenses by $2.5 billion by the end of 2012. 
Bristol-Myers anticipated a significant decline in operating profit following the loss of patent protection as increased competition from lower-priced generics would force sizeable reductions in the price of Plavix. Furthermore, Bristol-Myers considered Mead Johnson, a baby formula manufacturer, as a noncore business that was pursuing a focus on biotechnology drugs. Bristol-Myers shareholders greeted the announcement positively, with the firm's shares showing the largest one-day increase in eight months.
In the exchange offer, Bristol-Myers shareholders were able to exchange some, none, or all of their shares of Bristol-Myers common stock for shares of Mead Johnson common stock at a discount. The discount was intended to provide an incentive for Bristol-Myers shareholders to tender their shares. Also, the rapid appreciation of the Mead Johnson shares in the months leading up to the announced split-off suggested that these shares could have attractive long-term appreciation potential.
While the transaction did not provide any cash directly to the firm, it did indirectly augment Bristol-Myer's operating cash flow by $214 million annually. This represented the difference between the $350 million that Bristol-Myers paid in dividends to Mead Johnson shareholders and the $136 million it received in dividends from Mead Johnson each year. By reducing the number of Bristol-Myers shares outstanding, the transaction also improved Bristol-Myers' earnings per share by 4% in 2011. Finally, by splitting-off a noncore business, Bristol-Myers was increasing its attractiveness to investors interested in a "pure play" in biotechnology pharmaceuticals.
The exchange was tax free to Bristol-Myers shareholders participating in the exchange offer, who also stood to gain if the now independent Mead Johnson Corporation were acquired at a later date. The newly independent Mead Johnson had a poison pill in place to discourage any takeover within six months to a year following the split-off. The tax-free status of the transaction could have been disallowed by the IRS if the transaction were viewed as a "disguised sale" intended to allow Bristol-Myers to avoid paying taxes on gains incurred if it had chosen to sell Mead Johnson. 
Case Study Short Essay Examination Questions:
British Petroleum Sells Oil and Gas Assets to Apache Corporation
In the months that followed the oil spill in the Gulf of Mexico, British Petroleum agreed to create a $20 billion fund to help cover the damages and cleanup costs associated with the spill. The firm had agreed to contribute $5 billion to the fund before the end of 2010. To help meet this obligation and to help finance the more than $4 billion already spent on the spill, the firm announced on July 20, 2010, that it had reached an agreement to sell Apache Corporation its oil and gas fields in Texas and southeast New Mexico worth $3.1 billion; gas fields in Western Canada for $3.25 billion; and oil and gas properties in Egypt for $650 million. All of these properties had been in production for years, and their output rates were declining. 
Apache is a Houston, Texas-based independent oil and gas exploration firm with a reputation for being able to extract additional oil and gas from older properties. Also, Apache had operations near each of the BP properties, enabling them to take control of the acquired assets with existing personnel.
In what appears to have been a premature move, Apache agreed to acquire Mariner Energy and Devon Energy's offshore assets in the Gulf of Mexico for a total of $3.75 billion just days before the BP oil rig explosion in the Gulf. The acquisitions made Apache a major player in the Gulf just weeks before the United States banned temporarily deep-water drilling exploration in federal waters.
The announcement of the sale of these properties came as a surprise because BP had been rumored to be attempting to sell its stake in the oil fields of Prudhoe Bay, Alaska. The sale had been expected to fetch as much as $10 billion. The sale failed to materialize because of lingering concerns that BP might at some point seek bankruptcy protection and because the firm's creditors could seek to reverse an out-of-court asset sale as a fraudulent conveyance of assets. Fraudulent conveyance refers to the illegal transfer of assets to another party in order to defer, hinder, or defraud creditors. Under U.S. bankruptcy laws, courts might order that any asset sold by a company in distress, such as BP, must be encumbered with some of the liabilities of the seller if it can be shown that the distressed firm undertook the sale with the full knowledge that it would be filing for bankruptcy protection at a later date. 
Ideally, buyers would like to purchase assets "free and clear" of the environmental liabilities associated with the Gulf oil spill. Consequently, a buyer of BP assets would have to incorporate such risks in determining the purchase price for such assets. In some instances, buyers will buy assets only after the seller has gone through the bankruptcy process in order to limit fraudulent conveyance risks. 
Discussion Questions
1. In what sense were the BP properties strategically more valuable to Apache than to British Petroleum?
2. How could Apache have protected itself from risks that they might be required at some point in the future to be liable 
for some portion of the BP Gulf-related liabilities? What are some of the ways Apache could have estimated the potential costs of such liabilities? Be specific.
Case Study Short Essay Examination Questions:
Anatomy of a Spin-Off
On October 18, 2006, Verizon Communication's board of directors declared a dividend to the firm's shareholders consisting of shares in a company comprising the firm's domestic print and Internet yellow pages directories publishing operations (Idearc Inc.). The dividend consisted of 1 share of Idearc stock for every 20 shares of Verizon common stock. Idearc shares were valued at $34.47 per share. On the dividend payment date, Verizon shares were valued at $36.42 per share. The 1-to-20 ratio constituted a 4.73% yield-that is, $34.47/ ($36.42 × 20)-approximately equal to Verizon's then current cash dividend yield.
Because of the spin-off, Verizon would contribute to Idearc all its ownership interest in Idearc Information Services and other assets, liabilities, businesses, and employees currently employed in these operations. In exchange for the contribution, Idearc would issue to Verizon shares of Idearc common stock to be distributed to Verizon shareholders. In addition, Idearc would issue senior unsecured notes to Verizon in an amount approximately equal to the $9 billion in debt that Verizon incurred in financing Idearc's operations historically. Idearc would also transfer $2.5 billion in excess cash to Verizon. Verizon believed it owned such cash balances, since they were generated while Idearc was part of the parent.
Verizon announced that the spin-off would enable the parent and Idearc to focus on their core businesses, which may facilitate expansion and growth of each firm. The spin-off would also allow each company to determine its own capital structure, enable Idearc to pursue an acquisition strategy using its own stock, and permit Idearc to enhance its equity-based compensation programs offered to its employees. Because of the spin-off, Idearc would become an independent public company. Moreover, no vote of Verizon shareholders was required to approve the spin-off, since it constitutes the payment of a dividend permissible by the board of directors according to the bylaws of the firm. Finally, Verizon shareholders have no appraisal rights in connection with the spin-off.
In late 2009, Idearc entered Chapter 11 bankruptcy because it was unable to meet its outstanding debt obligations. In September 2010, a trustee for Idearc's creditors filed a lawsuit against Verizon, alleging that the firm breached its fiduciary responsibility by knowingly spinning off a business that was not financially viable. The lawsuit further contends that Verizon benefitted from the spin-off at the expense of the creditors by transferring $9 billion in debt from its books to Idearc and receiving $2.5 billion in cash from Idearc. 
Discussion Questions
1. How do you believe the Idearc shares were valued for purposes of the spin-off? Be specific.
2. Do you believe that it is fair for Idearc to repay a portion of the debt incurred by Verizon relating to Idearc's operations even though Verizon included Idearc's earnings in its consolidated income statement? Is the transfer of excess cash to the parent fair? Explain your answer.
3. Do you believe shareholders should have the right to approve a spin-off? Explain your answer?
4. To what extent do you believe that Verizon's activities could be viewed as fraudulent? Explain your answer.
Case Study Short Essay Examination Questions:
Anatomy of a Split-Off: Bristol-Myers Squibb
Under the Bristol-Myers Squibb exchange offer of Mead Johnson shares for shares of its common stock, announced on November 16, 2009, each BMS shareholder would receive $1.11 for each $1 of BMS stock tendered and accepted in the exchange offer. The exchange was subject to an upper limit of 0.6027 shares of MJ common stock per share of BMS common. 
On December 4, 2009, BMS amended the offer by increasing the maximum share exchange ratio to 0.6313, indicating it would accept for exchange a maximum of 269,281,601 shares of its stock and that if the exchange offer were oversubscribed, all shares tendered would be subject to proration. The proration formula was be determined by dividing the maximum number of MJ shares BMS was willing to exchange by the number of BMS shares actually tendered. 
The actual ratio at which shares of Bristol-Myers common stock and shares of Mead Johnson common stock were exchanged was determined by computing a simple three-day average of the shares of the two firms during December 8-10, 2009, subject to the 0.6313 upper limit. On December 16, 2009, Bristol-Myers announced it would exchange up to 170 million share of Mead Johnson common stock (i.e., all that it owned) for outstanding shares of its stock at an exchange ratio of 0.6313 shares of Mead Johnson common stock for each share of Bristol-Myers common stock tendered and accepted in the exchange offer.
Assuming that the three-day average of BMS and MJ share prices was $24.30 and $43.75, respectively, BMS shareholders whose tendered shares were accepted in the exchange offer received the higher of $26.97 (i.e., $24.30 × 1.11) or $27.62 (i.e., 0.6313 × $43.75). Therefore, a BMS shareholder tendering 100 shares of BMS stock would have received the share equivalent of $2,762 ($27.62 × 100) or 63.13 MJ shares at $43.75 per shares (i.e., $2,762 ÷ $43.75). Fractional shares were paid in cash.
The actual number of BMS shares tendered totaled 500,547,697, resulting in a proration ratio of 53.80% (i.e., 269,281,601 ÷ 500,547,697). Each shareholder tendering BMS shares would only have 53.80% of their tendered shares accepted for the exchange. 
Discussion Questions:
1. Why did Bristol-Myers Squibb offer its shareholders $1.11 worth of Mead Johnson stock for each $1 of Bristol-Myers Squibb stock tendered and accepted in the exchange offer?
2. Why did Bristol-Myers Squibb prorate the number of shares tendered in the exchange offer?
Case Study Short Essay Examination Questions:
Inside M&A. Financial Services Firms Streamline their Operations
During 2005 and 2006, a wave of big financial services firms announced their intentions to spin-off operations that did not seem to fit strategically with their core business. In addition to realigning their strategies, the parent firms noted the favorable tax consequences of a spin-off, the potential improvement in the parent's financial returns, the elimination of conflicts with customers, and the removal of what, for some, had become a management distraction.
American Express announced plans in early 2005 to jettison its financial advisory business through a tax-free spin-off to its shareholders. The firm also noted that it would incur significant restructuring-related expenses just before the spin-off. Such one-time write-offs by the parent are sometimes necessary to "clean up" the balance sheet of the unit to be spun off and unburden the newly formed company's earnings performance. American Express anticipated substantial improvement in future financial returns on assets as it will be eliminating more than $410 billion in assets from its balance sheet that had been generating relatively meager earnings.
Investment bank Morgan Stanley announced in mid-2005 its intent to spin-off its Discover Credit Card operation. While Discover Card generated about one fifth of the firm's pretax profits, Morgan Stanley had been unable to realize significant synergies with its other operations. The move represented an attempt by senior Morgan Stanley management to mute shareholder criticism of the company's lackluster stock performance due to what many viewed had been the firm's excessive diversification.
Similarly, J.P. Morgan Chase announced plans in 2006 to spin off its $13 billion private equity fund, J.P. Morgan Partners. The bank would invest up to $1 billion in a new fund J.P. Morgan Partners plans to open as a successor to the current Global Fund. Because the bank's ownership position would be less than 25 percent, it would be classified as a passive partner. The expectation is that, by jettisoning this operation, the bank would be able to reduce earnings volatility and decrease competition between the bank and large customers when making investments.
-In what ways might the spin-offs harm parent firm shareholders?

Quizplus · Accepted Answer

The Answer of Bristol-Myers Squibb Splits Off Rest of Mead Johnson
Facing the loss of patent protection for its blockbuster drug Plavix, a blood thinner, in 2012, Bristol-Myers Squibb Company decided to split off its 83% ownership stake in Mead Johnson Nutrition Company in late 2009 through an offer to its shareholders to exchange their Bristol-Myers shares for Mead Johnson shares. The decision was part of a longer-term restructuring strategy that included the sale of assets to raise money for acquisitions of biotechnology drug companies and the elimination of jobs to reduce annual operating expenses by $2.5 billion by the end of 2012. 
Bristol-Myers anticipated a significant decline in operating profit following the loss of patent protection as increased competition from lower-priced generics would force sizeable reductions in the price of Plavix. Furthermore, Bristol-Myers considered Mead Johnson, a baby formula manufacturer, as a noncore business that was pursuing a focus on biotechnology drugs. Bristol-Myers shareholders greeted the announcement positively, with the firm's shares showing the largest one-day increase in eight months.
In the exchange offer, Bristol-Myers shareholders were able to exchange some, none, or all of their shares of Bristol-Myers common stock for shares of Mead Johnson common stock at a discount. The discount was intended to provide an incentive for Bristol-Myers shareholders to tender their shares. Also, the rapid appreciation of the Mead Johnson shares in the months leading up to the announced split-off suggested that these shares could have attractive long-term appreciation potential.
While the transaction did not provide any cash directly to the firm, it did indirectly augment Bristol-Myer's operating cash flow by $214 million annually. This represented the difference between the $350 million that Bristol-Myers paid in dividends to Mead Johnson shareholders and the $136 million it received in dividends from Mead Johnson each year. By reducing the number of Bristol-Myers shares outstanding, the transaction also improved Bristol-Myers' earnings per share by 4% in 2011. Finally, by splitting-off a noncore business, Bristol-Myers was increasing its attractiveness to investors interested in a "pure play" in biotechnology pharmaceuticals.
The exchange was tax free to Bristol-Myers shareholders participating in the exchange offer, who also stood to gain if the now independent Mead Johnson Corporation were acquired at a later date. The newly independent Mead Johnson had a poison pill in place to discourage any takeover within six months to a year following the split-off. The tax-free status of the transaction could have been disallowed by the IRS if the transaction were viewed as a "disguised sale" intended to allow Bristol-Myers to avoid paying taxes on gains incurred if it had chosen to sell Mead Johnson. 
Case Study Short Essay Examination Questions:
British Petroleum Sells Oil and Gas Assets to Apache Corporation
In the months that followed the oil spill in the Gulf of Mexico, British Petroleum agreed to create a $20 billion fund to help cover the damages and cleanup costs associated with the spill. The firm had agreed to contribute $5 billion to the fund before the end of 2010. To help meet this obligation and to help finance the more than $4 billion already spent on the spill, the firm announced on July 20, 2010, that it had reached an agreement to sell Apache Corporation its oil and gas fields in Texas and southeast New Mexico worth $3.1 billion; gas fields in Western Canada for $3.25 billion; and oil and gas properties in Egypt for $650 million. All of these properties had been in production for years, and their output rates were declining. 
Apache is a Houston, Texas-based independent oil and gas exploration firm with a reputation for being able to extract additional oil and gas from older properties. Also, Apache had operations near each of the BP properties, enabling them to take control of the acquired assets with existing personnel.
In what appears to have been a premature move, Apache agreed to acquire Mariner Energy and Devon Energy's offshore assets in the Gulf of Mexico for a total of $3.75 billion just days before the BP oil rig explosion in the Gulf. The acquisitions made Apache a major player in the Gulf just weeks before the United States banned temporarily deep-water drilling exploration in federal waters.
The announcement of the sale of these properties came as a surprise because BP had been rumored to be attempting to sell its stake in the oil fields of Prudhoe Bay, Alaska. The sale had been expected to fetch as much as $10 billion. The sale failed to materialize because of lingering concerns that BP might at some point seek bankruptcy protection and because the firm's creditors could seek to reverse an out-of-court asset sale as a fraudulent conveyance of assets. Fraudulent conveyance refers to the illegal transfer of assets to another party in order to defer, hinder, or defraud creditors. Under U.S. bankruptcy laws, courts might order that any asset sold by a company in distress, such as BP, must be encumbered with some of the liabilities of the seller if it can be shown that the distressed firm undertook the sale with the full knowledge that it would be filing for bankruptcy protection at a later date. 
Ideally, buyers would like to purchase assets "free and clear" of the environmental liabilities associated with the Gulf oil spill. Consequently, a buyer of BP assets would have to incorporate such risks in determining the purchase price for such assets. In some instances, buyers will buy assets only after the seller has gone through the bankruptcy process in order to limit fraudulent conveyance risks. 
Discussion Questions
1. In what sense were the BP properties strategically more valuable to Apache than to British Petroleum?
2. How could Apache have protected itself from risks that they might be required at some point in the future to be liable 
for some portion of the BP Gulf-related liabilities? What are some of the ways Apache could have estimated the potential costs of such liabilities? Be specific.
Case Study Short Essay Examination Questions:
Anatomy of a Spin-Off
On October 18, 2006, Verizon Communication's board of directors declared a dividend to the firm's shareholders consisting of shares in a company comprising the firm's domestic print and Internet yellow pages directories publishing operations (Idearc Inc.). The dividend consisted of 1 share of Idearc stock for every 20 shares of Verizon common stock. Idearc shares were valued at $34.47 per share. On the dividend payment date, Verizon shares were valued at $36.42 per share. The 1-to-20 ratio constituted a 4.73% yield-that is, $34.47/ ($36.42 × 20)-approximately equal to Verizon's then current cash dividend yield.
Because of the spin-off, Verizon would contribute to Idearc all its ownership interest in Idearc Information Services and other assets, liabilities, businesses, and employees currently employed in these operations. In exchange for the contribution, Idearc would issue to Verizon shares of Idearc common stock to be distributed to Verizon shareholders. In addition, Idearc would issue senior unsecured notes to Verizon in an amount approximately equal to the $9 billion in debt that Verizon incurred in financing Idearc's operations historically. Idearc would also transfer $2.5 billion in excess cash to Verizon. Verizon believed it owned such cash balances, since they were generated while Idearc was part of the parent.
Verizon announced that the spin-off would enable the parent and Idearc to focus on their core businesses, which may facilitate expansion and growth of each firm. The spin-off would also allow each company to determine its own capital structure, enable Idearc to pursue an acquisition strategy using its own stock, and permit Idearc to enhance its equity-based compensation programs offered to its employees. Because of the spin-off, Idearc would become an independent public company. Moreover, no vote of Verizon shareholders was required to approve the spin-off, since it constitutes the payment of a dividend permissible by the board of directors according to the bylaws of the firm. Finally, Verizon shareholders have no appraisal rights in connection with the spin-off.
In late 2009, Idearc entered Chapter 11 bankruptcy because it was unable to meet its outstanding debt obligations. In September 2010, a trustee for Idearc's creditors filed a lawsuit against Verizon, alleging that the firm breached its fiduciary responsibility by knowingly spinning off a business that was not financially viable. The lawsuit further contends that Verizon benefitted from the spin-off at the expense of the creditors by transferring $9 billion in debt from its books to Idearc and receiving $2.5 billion in cash from Idearc. 
Discussion Questions
1. How do you believe the Idearc shares were valued for purposes of the spin-off? Be specific.
2. Do you believe that it is fair for Idearc to repay a portion of the debt incurred by Verizon relating to Idearc's operations even though Verizon included Idearc's earnings in its consolidated income statement? Is the transfer of excess cash to the parent fair? Explain your answer.
3. Do you believe shareholders should have the right to approve a spin-off? Explain your answer?
4. To what extent do you believe that Verizon's activities could be viewed as fraudulent? Explain your answer.
Case Study Short Essay Examination Questions:
Anatomy of a Split-Off: Bristol-Myers Squibb
Under the Bristol-Myers Squibb exchange offer of Mead Johnson shares for shares of its common stock, announced on November 16, 2009, each BMS shareholder would receive $1.11 for each $1 of BMS stock tendered and accepted in the exchange offer. The exchange was subject to an upper limit of 0.6027 shares of MJ common stock per share of BMS common. 
On December 4, 2009, BMS amended the offer by increasing the maximum share exchange ratio to 0.6313, indicating it would accept for exchange a maximum of 269,281,601 shares of its stock and that if the exchange offer were oversubscribed, all shares tendered would be subject to proration. The proration formula was be determined by dividing the maximum number of MJ shares BMS was willing to exchange by the number of BMS shares actually tendered. 
The actual ratio at which shares of Bristol-Myers common stock and shares of Mead Johnson common stock were exchanged was determined by computing a simple three-day average of the shares of the two firms during December 8-10, 2009, subject to the 0.6313 upper limit. On December 16, 2009, Bristol-Myers announced it would exchange up to 170 million share of Mead Johnson common stock (i.e., all that it owned) for outstanding shares of its stock at an exchange ratio of 0.6313 shares of Mead Johnson common stock for each share of Bristol-Myers common stock tendered and accepted in the exchange offer.
Assuming that the three-day average of BMS and MJ share prices was $24.30 and $43.75, respectively, BMS shareholders whose tendered shares were accepted in the exchange offer received the higher of $26.97 (i.e., $24.30 × 1.11) or $27.62 (i.e., 0.6313 × $43.75). Therefore, a BMS shareholder tendering 100 shares of BMS stock would have received the share equivalent of $2,762 ($27.62 × 100) or 63.13 MJ shares at $43.75 per shares (i.e., $2,762 ÷ $43.75). Fractional shares were paid in cash.
The actual number of BMS shares tendered totaled 500,547,697, resulting in a proration ratio of 53.80% (i.e., 269,281,601 ÷ 500,547,697). Each shareholder tendering BMS shares would only have 53.80% of their tendered shares accepted for the exchange. 
Discussion Questions:
1. Why did Bristol-Myers Squibb offer its shareholders $1.11 worth of Mead Johnson stock for each $1 of Bristol-Myers Squibb stock tendered and accepted in the exchange offer?
2. Why did Bristol-Myers Squibb prorate the number of shares tendered in the exchange offer?
Case Study Short Essay Examination Questions:
Inside M&A. Financial Services Firms Streamline their Operations
During 2005 and 2006, a wave of big financial services firms announced their intentions to spin-off operations that did not seem to fit strategically with their core business. In addition to realigning their strategies, the parent firms noted the favorable tax consequences of a spin-off, the potential improvement in the parent's financial returns, the elimination of conflicts with customers, and the removal of what, for some, had become a management distraction.
American Express announced plans in early 2005 to jettison its financial advisory business through a tax-free spin-off to its shareholders. The firm also noted that it would incur significant restructuring-related expenses just before the spin-off. Such one-time write-offs by the parent are sometimes necessary to "clean up" the balance sheet of the unit to be spun off and unburden the newly formed company's earnings performance. American Express anticipated substantial improvement in future financial returns on assets as it will be eliminating more than $410 billion in assets from its balance sheet that had been generating relatively meager earnings.
Investment bank Morgan Stanley announced in mid-2005 its intent to spin-off its Discover Credit Card operation. While Discover Card generated about one fifth of the firm's pretax profits, Morgan Stanley had been unable to realize significant synergies with its other operations. The move represented an attempt by senior Morgan Stanley management to mute shareholder criticism of the company's lackluster stock performance due to what many viewed had been the firm's excessive diversification.
Similarly, J.P. Morgan Chase announced plans in 2006 to spin off its $13 billion private equity fund, J.P. Morgan Partners. The bank would invest up to $1 billion in a new fund J.P. Morgan Partners plans to open as a successor to the current Global Fund. Because the bank's ownership position would be less than 25 percent, it would be classified as a passive partner. The expectation is that, by jettisoning this operation, the bank would be able to reduce earnings volatility and decrease competition between the bank and large customers when making investments.
-In what ways might the spin-offs harm parent firm shareholders?