Chapter 6 Flashcards
(15 cards)
What is corporate restructuring?
Actions firms take to reorganize operations, structure, or assets without a full M&A.
Name three common methods of corporate restructuring.
Equity carve-outs, spin-offs, split-ups, tracking stock.
What is an equity carve-out?
Selling a minority stake in a subsidiary via IPO while retaining control.
What is a spin-off?
Distributing shares of a subsidiary to existing shareholders tax-free.
What is a split-up?
Dividing a company into multiple independent firms, usually via spin-offs.
What is tracking stock?
Shares that track the performance of a division but don’t confer ownership.
Why might a firm prefer a carve-out over a spin-off?
When the subsidiary is undervalued, the parent wants cash, or to retain control.
What is the conglomerate discount?
Market undervalues diversified firms, so breaking them up may unlock value.
How does Modigliani and Miller’s theory apply to restructuring?
If markets are perfect, firm value isn’t affected by its structure – reality differs due to costs.
What role does asymmetric information play in restructuring value?
Managers convey private information through restructuring choices (e.g. issuing equity vs carving out).
How does restructuring impact managerial incentives and monitoring?
Smaller, more focused firms are easier to monitor and align incentives with shareholders.
What is the make-or-buy decision in transaction cost theory?
A firm should divest if buying from the market is more efficient than producing internally.
What does empirical evidence suggest about the size of a divestiture and shareholder value?
Larger divestitures often generate larger positive announcement returns.
What is a diversification discount?
The observation that diversified firms trade at lower valuations than focused ones.
Which methods are often used sequentially in restructuring?
Equity carve-outs can lead to spin-offs or sales of remaining stakes.
