Corp Control

Corporate Control – Questions for Discussion                       AFM – Professor Doran

Part 1 – Due on Wednesday, November 8

1.  Pfizer Tightens Focus on Prescription Drugs

1. What is a “divestiture”?  Name the three basic types of divestiture.

Divestiture means the partial or full disposal of a business unit through sale, exchange, closure or bankruptcy. It is the result from a management decision to cease operating a business unit because it is not part of a core competency.

Sale 2. Spin-off 3. Carve out

1. What is Pfizer doing?  Why?

Pfizer is exploring a sale or spin-off of its consumer-health business. Pfizer has been cutting ties with non-pharmaceutical businesses. The consumer healthcare is distinct enough from their core business that there is a potential for its value to be fully realized outside the company.

1. The article quotes Pfizer’s CEO as saying the consumer health business is “distinct enough from our core business that there is potential for its value to be more fully realized outside the company.”  What does this mean?

Meaning that they think this business unit is not essential to the firm’s core business. Increase corporate focus and market undervalue that section of the company. Stock price is greater individually

1. A desire to increase “corporate focus” is often cited as a reason for divestitures.  Explain what this means.  Do you think this is the reason for Pfizer’s decision?  Why or why not?

Companies often divest assets and business units that no longer fit with the company’s core business. Therefore, it helps companies maintain their strategic focus. They sometimes also divest underperforming assets so that they can free up internal assets and can use them to strengthen its other business. It also provides cash to purchase or improve assets that can enhance profitability.

Yes. From the case, it said the proceeds from selling the consumer healthcare units can give Pfizer more firepower to deal for prescription-drug companies. Rivals have pushed to consolidate in the $233 billion global consumer-health market.

2. Honeywell Plans Pair of Spinoffs

     a.         What is a “spinoff”?  How is a spinoff different from a “sell off”?

 Spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. It is a type of Divestiture.

Spinoff: original set of shareholders is identical for each firm but will change as each firm trades independently. Also, Parent company still has some control over it.

Selloff: Parent firm no longer has any control of what was sold. Parent managers no long have control

b.         What characteristics must a unit have in order for it to be spun off successfully?

Independent; standalone as an economic entity. Support itself; fulfill the SEC Regulations.

     c.         Do you think spinoffs of its home and transportation businesses is good for Honeywell’s shareholders?  Why or why not?

Good: Increase corporate ‘focus’— “focus on fewer markets and verticals”

Bad: shares are up 24% so far this year, but were up less than 0.1% recently

1. The article states that Honeywell expects the spinoffs to be tax-free to its shareholders.  What does this mean?  Are all spinoffs tax free?  Why or why not?

In a Spinoff, the company will distribute stock of the spun-off company to shareholders of parent company. (the parent company distributes shares in new spinoff to existing shareholders in direct proportion to their equity interest in the parent) There is no cash exchange involved. So the company does not incur a tax bill.

Majority Spinoffs are tax-free since the shareholders and the parent company do not recognize taxable capital gains.

3.  Companies Chase Spinoff Bump

a.          List several reasons and/or advantages for firms doing spinoffs.  

Reasons: Increase corporate focus so that managers are more focused on core business and may improve company efficiency. Market can more accurately assess each business unit.

Advantages: Tax free to both parent company and its shareholders

b.         Why do investors, particularly activist and institutional investors, favor spinoffs?

Spinoffs’ Long history of outperforming the broader market; S&P US Spin-Off Index has outperformed S&P 300 by nearly 190% over the past decade; Spinoff companies tend to have mgmt. teams that are better incentivized; help the parent company be valued by investors at a higher multiple of earnings

4.  Few Spinoffs Make a Clean Break

a.         What problems related to spinoffs are discussed in the article?

The drawbacks brought by the Spin-off: the new company often needs time to build back-office capabilities which can delay the parent company CFO’s cost-cutting plans and create inefficiencies. Also, spinoff can reduce the parent company’s revenues or size; CFO must also overhaul the systems and processes to curb financial reporting risks. Sometimes there are some ties to the parent company

     b.         The article mentions that activist investors may pressure managers about “unlocking the value of individual business lines.”  What does this mean?

 Activist investors love spin-offs as they think spinoffs can help the parent company be valued by investors at a higher multiple of earnings.    

5.  Yum! letter to shareholders 

a.         What is Yum! doing?

Yum! Want to separate their China business from Yum brand into a newly formed public company named Yum China Holdings, Inc.

b.    Why do you think the managers and board of Yum! decided to split the company into two?

The company’s Asian business could be better served with a more focused strategy there. (Has been losing market share amid shifting consumer tastes, rising nationalistic sentiments and food safety scandals in recent years)

c.     What are the tax implications for current shareholders of Yum!?  Why?

The shares of the new company’s common stock is tax-free for US Federal income tax purposes, except for cash received in lieu of fractional shares. It is tax-free since each YUM current shareholders will just receive one share of the new company common stock for each share of YUM common stock held on the record date. There is no taxable capital gain/loss recognized