- Chapter 12.PPT

?2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - - - - - - - - Chapter 12 - - - - - - - - Restructuring Organization and Ownership Relationships Spin-Offs Company owns or creates a subsidiary whose shares are distributed on a pro rata basis to shareholders of parent company Subsidiary becomes publicly owned corporation Parent company often will retain from 10% to under 20% of shares of the new subsidiary Spin-off often follows the initial sale of up to 20% of the shares in an initial public offering (IPO) — transaction known as an equity carve-out Event return studies of spin-offs Significant positive 3-5% abnormal return to parent shareholders Size of announcement effect positively related to size of spin-off Spin-offs to avoid regulation experienced abnormal returns of 5-6% as compared to 2-3% for the remainder of the sample No adverse effect on bondholders Tax effects No positive abnormal returns for taxable spin-offs Positive abnormal returns for nontaxable Controlling for size, tax effects disappear Both spin-offs and their parents are more frequently involved in subsequent takeovers Firms which engage in no further restructuring activity earn only normal returns Firms which engage in subsequent takeovers account for positive abnormal returns Performance studies of spin-offs Bregman Annualized returns were 31.8%, 18 points better than SP 500 Karen and Eric Wruck Spin-offs outperformed overall stock market Few spectacular performances dominated results Forbes study Combined stock performance of parent and spin-off 40% did better than SP 500 60% underperformed Anslinger, Klepper, and Subramaniam (1999) Sample of 12 spin-offs achieved returns over a two-year period of 26.9% compared to 17.2% for the SP 500 8 spin-offs underpeformed index Mixed results may reflect characteristics of industries Firms in industries with excess capacity or low sales growth underperform broader indexes Results should be related