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With constantly changing competitive
environments, firms must consistently adjust
Managers have many options to change firm
structure without taking part in a merger or
Corporate restructuring should occur within the
framework of the firm’s overall strategy
No one-size-fits-all approach to corporate
decision making

Methods are sometimes used in tandem
or employed sequentially
Asset Sale:
Sale of a division, subsidiary, product line or
other assets directly to another firm.
Transferred subsidiary or division is absorbed
within the organizational framework of the
buying company
Payment is usually in cash
Equity Carve-out:
Offering of full or partial interest in a
subsidiary to the investment public
Creates a separate publicly traded company
Effectively, is an IPO of a corporate

Pro-rata distribution of shares in a subsidiary
to the existing shareholders of the parent.
Effectively, a stock dividend in a subsidiary
No cash is generated; but has capital
structure implications
Creates a new publicly traded company that
is completely separate from the parent

Separation of a company into two or more
Applied to strategic breaking up of the entire
corporate body
Is usually accomplished with one or more
equity carve-outs or spin-offs

Tracking stock:
Separate class of common stock of a parent
Value of this stock is based on cash flows of a
specific division

Exchange Offer:
Distribution giving shareholders a choice of
retaining shares of parent company or
exchanging for shares of new subsidiary
Creates a separate publicly traded company
Shares in new firm are received only by
those shareholders who opt to exchange
the shares in the parent
Restructuring Example:
AT&T has used almost every restructuring
method in last 20 years
1984 antitrust break up: split-up using spin-offs
Shareholders receive 1 share of each “Baby
Bell” for every 10 AT&T shares
AT&T Capital
1993 $107.5 million public offering of 14%
1996 $2.2 billion asset sale to an investor
1995-6 Split-up
Lucent: $3 billion carve-out in 18% IPO,
followed by spin-off (.324 shares Lucent for
each AT&T)
NCR: spin-off (0.0625 NCR shares per AT&T)
Universal Card: asset sale for $3.5 billion to

AT&T Wireless
Tracking stock representing 15.6% interest was
sold in IPO for $10.6 billion
Later, exchange offer gave shareholders choice
of AT&T or AT&T Wireless stock
Last, spin-off executed in which 0.32 wireless
shares were distributed to AT&T holders
AT&T Broadband
10/00 – AT&T announces it will divest unit
7/01 – Comcast makes unsolicited bid, forcing
AT&T into an auction
12/01 – Comcast declared auction winner

More Restructuring Examples

Auto Parts Industry
GM divested Delphi Automotive Systems
(1999) – 17.3% equity carve-out offered in
IPO, followed by a spin-off
Ford spun off Visteon via a stock dividend

Phillip Morris
Restructuring to reinforce strategy of focus on
food and tobacco
Equity carve-out of 16% of Kraft ($8.7 billion)
helped pay down debt from Nabisco
Asset sale of Miller Brewing to South African
Breweries for $5.6 billion

Many possible motives for a firm to restructure
Direct relation between corporate strategy and
corporate restructuring
Corporate focus often cited as restructuring
reason, but focused companies also must
review strategic alternatives in due to market
Divestiture reasons: learning, reversing
mistakes, changing strategies (Weston, 1989)
Firms restructure to remain competitive and to
respond to change forces in the economy


Modigliani, Miller, and Irrelevance
If no transaction or information costs,
corporate organization is irrelevant
Managers cannot improve value by chopping
firm into pieces
Theory frames analysis of information and
transactions costs and other factors

Restructuring and Transaction Costs:

Petrochemical Industry
Study of transaction cost uncertainty on
vertical integration (Fan, 1996, 2000)
Impact of uncertain oil prices:
Before 1973 OPEC oil embargo, 13% of
sample firms owned oil and gas assets
After embargo, fraction increased to over
By 1992, fraction reverted back to 26%
Consolidation due to energy contracts being
difficult to write and to enforce (higher
transaction costs)
Example: Dupont (chemicals) bought Conoco
(oil) in 1981; divested in carve-out and
exchange offer in 1998-99

Restructuring and Change Forces: The Natural

Gas Industry
Change forces transformed industry over
course of 100 years
Early 1900s – production close to consumers
1920s – gas discoveries in southwest required
construction of pipelines – vertical integration
between production and transmission
1930s – price regulation, and legislation
requiring separation of production and
transmission– caused decline in vertical
Current landscape – changing regulation has
encouraged mergers and divestitures