Page 135 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 7: Corporate Level Strategies

8. To realise profit from the sale of profitable divisions: This type of divestiture occurs when Notes
a firm acquires under-performing businesses, makes it profitable and then sells it to other
companies. The parent company may repeat this process to make profit out of it.

9. To reduce the debt burden: Many companies sell their assets or divisions to reduce their
debt and bring the balance in the capital structure of the firm.
10. To help to finance new acquisitions: Companies may sell less profitable divisions and buy
more profitable divisions in order to increase the profitability of the company as a whole.

Types of Divestitures

1. Spin-off: It is a kind of demerger when an existing parent company distributes on a pro-
rata basis the shares of the new company to the shareholders of the parent company free
of cost. There is no money transaction, subsidiary's assets are not revalued, and transaction
is treated as stock dividend. Both the companies exist and carry on their businesses
independently after spin-off. During spin-off, a new company comes into existence. The
shareholders of the parent company become the shareholders of the new company spun-
off.
The motivations for a spin-off are similar to that of divestitures.

(a) Involuntary Spin-off: When faced with an adverse regulatory ruling, a firm may be
forced to spin-off to comply with the legal formalities.
(b) Defensive Spin-off: Defensive spin-off is a takeover defence. Company may choose to
spin-off divisions to make it less attractive to the bidder.
(c) Tax consequences of Spin-off: Shares allotted to the shareholders during spin-off is not
taxed as capital gain or as dividend.

Example: ITC has spun-off hotel business from the company and formed ITC Hotels Ltd.

2. Sell-off: It is a form of restructuring, where a firm sells a division to another company.
When the business unit is sold, payment is received generally in the form of cash or
securities.
When the firm decides to sell a poorly performing division, this asset goes to another
owner, who presumably values it more highly because he can use the asset more
advantageously than the seller. The seller receives cash in the place of asset. So the firm
can use this cash more efficiently than it was utilising the asset that was sold. The firm can
also get premium for the assets because the buyer can more advantageously use such
assets.

Sell-off generally have positive impact on the market price of shares of both the buyer and
seller companies. So sell-offs are beneficial for the shareholders of both the companies.
3. Voluntary corporate liquidation or bust-ups: It is also known as complete sell-off. The
companies normally go for voluntary liquidation because they create value to the
shareholders. The firm may have a higher value in liquidation than the current market
value. Here the firm sells its assets/divisions to multiple parties which may result in a
higher value being realised than if they had to be sold as a whole. Through a series of spin-
offs or sell-offs a company may go ultimately for liquidation.
4. Equity carveouts: It is a different type of divestiture and different form of spin-off and sell-
off. It resembles Initial Public Offering (IPO) of some portion of equity stock of a wholly
owned subsidiary by the parent company.

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