Spin-Offs Reemerge as Favored Way to Unlock Stockholder Value

Spin-Offs Reemerge as Favored Way to Unlock Stockholder Value

By Stephen I. Glover and R. McMillan Price

Excerpt:

Spin-offs and other business separation transactions have reemerged as a favored way for large, diversified companies to unlock stockholder value. This article provides an overview of the reasons for dividing a company, the varied structures used to effect a business separation, and the legal issues that executives and their advisors need to bear in mind.

1. Why a Business Separation?

There are many reasons for a company to pursue a business separation or "break-up" transaction. Business separations enable companies to tailor their strategic plans, business policies and capital allocation decisions to the unique needs of particular business lines. They can improve management focus and facilitate the alignment of management compensation packages with the strategic goals and performance metrics of the particular businesses. Business separations can also eliminate intra-company conflicts that prevent different business lines from pursuing agreements with each other's competitors. Further, separation transactions can free unique businesses to pursue their optimal capital structure and resource allocation, independent of considerations for the other businesses. They may also facilitate the sale of a single business or subset of businesses. Some break-ups are also motivated by the desire of management to rid itself of a business that has a high risk or low return profile relative to the company as a whole. Finally, separation transactions may also be used to defend against hostile takeovers, avoid burdensome regulations imposed on a company-wide basis, reduce liability insurance expenses, or avoid violating antitrust laws.

Many business separation transactions are ultimately driven by management's or activist stockholders' desire to improve share prices, independent of business performance considerations. The market may discount conglomerates as a result of, among other things, the difficulty in valuing several unrelated businesses comprising a single company. "Pure play" companies, by contrast, are generally easier for investors and analysts to understand and may command a relatively higher market value as a result.

Access the full version of "Spin-Offs Reemerge as Favored Way to Unlock Stockholder Value" with your lexis.com ID. Additional fees may be incurred.

If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

For more information about LexisNexis products and solutions connect with us through our corporate site.

Stephen I. Glover is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP. He has an extensive practice representing public and private companies in complex mergers and acquisitions, joint ventures, equity and debt offerings and corporate governance matters. Mr. Glover is the author or co-author of several books, including M&A Practice Guide (2009); Business Separations Transactions: Spin-Offs, Subsidiary IPOs and Tracking Stock (revised 2011);and Partnerships, Joint Ventures and Strategic Alliances (revised 2011).

R. McMillan Price is an associate in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP. His practice focuses on mergers and acquisitions, public offerings and private placements, securities law compliance, corporate governance, and domestic and international investment fund formation and operation. He has represented financial and strategic buyers and sellers, as well as both issuers and underwriters.

For more information about LexisNexis products and solutions connect with us through our corporate site