The Deutsche-Telekom board decided against a divestiture of T-Mobile or an initial public offering to pursue a reverse merger. What other alternatives to merging its wholly-owned subsidiary T-Mobile with another firm could Deutsche-Telekom have pursued? Be specific. What are the advantages and disadvantages of the other options?

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The Answer is Common restructuring strategies that could have been used as an alternative to a reverse merger include a spin-off, split-off or equity carve-out. These options are discussed in Chapters 1 and in considerable detail in Chapter 16.
A spin-off involves the payment of the stock of T-Mobile held by Deutsche-Telekom to its shareholders as a dividend. Procedurally, it is relatively straight forward as the board of directors has the sole right to declare the type (cash or stock) and timing of dividends. Properly structured the dividend would be tax-free to Deutsche-Telekom's shareholders. The distribution would have the added advantage of giving the receiving shareholder the right to determine what to do with the shares: hold or sell. Spin-offs can be complicated by significant amounts of intercompany loans between the parent and the subsidiary. If the parent burdens the subsidiary with excessive amounts of debt before spinning off the unit, the spun-off unit may be forced into bankruptcy. Under fraudulent conveyance laws, the parent may be forced to take back the unit and to pay-off its creditors.
A split-off is similar to a spin-off, in that a firm's subsidiary becomes an independent firm and the parent firm does not generate any new cash. However, unlike a spin-off, the split-off involves an offer to exchange parent stock for stock in the parent firm's subsidiary at an exchange ratio determined by the parent firm. Split-offs most often arise when a portion of the parent firm's shareholders prefer to own the shares of a subsidiary of the parent rather than the parent's shares.
The subsidiary equity carve-out is a transaction in which the parent creates a wholly owned, independent subsidiary, with stock and a management team that are different from the parent's, and issues a portion of the subsidiary's stock to the public. Usually, only a minority share of the parent's ownership in the subsidiary is issued to the public. The cash raised may be retained in the subsidiary or transferred to the parent as a dividend, a stock repurchase, or an intercompany loan. Equity carve-outs exhibit characteristics similar to spin-offs. Both result in the subsidiary's stock's being traded separately from the parent's stock. A potentially significant drawback to the carve-out is the creation of minority shareholders. Equity carve-outs provide an opportunity to raise funds for reinvestment in the subsidiary, paying off debt, or paying a dividend to the parent firm. A carve-out frequently is a prelude to a divestiture, since it provides an opportunity to value the business by selling stock in a public stock exchange. Carve outs can create significant tax liabilities for the parent.

The Deutsche-Telekom Board Decided Against a Divestiture of T-Mobile or an Initial