Contraction Transactions
Corporate restructuring and the LBO
CHAPTER 3: CONTRACTIONS
Contraction is the reduction in the size of the private company or business due to corporate restructuring.
3.1 Spin-Offs—A spin-off transaction is when a parent company separates the shares of its subsidiary from the original private company shares and distributes those shares, on a pro-rata basis to its shareholders. In essence, two separate entities are formed in which the stockholders are issued the shares in the legal subsidiary proportional to their original holdings in the parent company. Both the entities have their own management and run individually after the spin-off. The distribution of the subsidiary’s stock to shareholders is in the form of a dividend. This is typically a tax-free transaction for both the shareholders and the parent.
Example:
Air-India has formed a separate company named Air-India Engineering Services Ltd., by spinning-off its engineering division.
Guidant was spun out of Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division.
Agilent Technologies spun out of Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division.
Cenovus Energy was spun out of Encana Corporation in 2009
Shugart Associates was a spin-out of IBM.
3.2 Split-Offs—A split off is the separation of a subsidiary from the parent by splitting the shareholders of the parent company’s stock from the shareholders of the subsidiary’s stock. Most split-offs are tax-free transactions and used to downsize a company or defend against a hostile takeover. In a split-off a new company is created to take over the operations of an existing unit or division and some of the parent company’s shareholders will receive the stocks in subsidiary or in new private company in exchange for the parent private company’s stocks. As a result, the parent company will be able downsize its overall business
figure3.2.1: split offs
3.3 Split-Ups—A split
CHAPTER 3: CONTRACTIONS
Contraction is the reduction in the size of the private company or business due to corporate restructuring.
3.1 Spin-Offs—A spin-off transaction is when a parent company separates the shares of its subsidiary from the original private company shares and distributes those shares, on a pro-rata basis to its shareholders. In essence, two separate entities are formed in which the stockholders are issued the shares in the legal subsidiary proportional to their original holdings in the parent company. Both the entities have their own management and run individually after the spin-off. The distribution of the subsidiary’s stock to shareholders is in the form of a dividend. This is typically a tax-free transaction for both the shareholders and the parent.
Example:
Air-India has formed a separate company named Air-India Engineering Services Ltd., by spinning-off its engineering division.
Guidant was spun out of Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division.
Agilent Technologies spun out of Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division.
Cenovus Energy was spun out of Encana Corporation in 2009
Shugart Associates was a spin-out of IBM.
3.2 Split-Offs—A split off is the separation of a subsidiary from the parent by splitting the shareholders of the parent company’s stock from the shareholders of the subsidiary’s stock. Most split-offs are tax-free transactions and used to downsize a company or defend against a hostile takeover. In a split-off a new company is created to take over the operations of an existing unit or division and some of the parent company’s shareholders will receive the stocks in subsidiary or in new private company in exchange for the parent private company’s stocks. As a result, the parent company will be able downsize its overall business
figure3.2.1: split offs
3.3 Split-Ups—A split