All businesses share a similar life cycle through forming, growing, maturing and sometimes ending. Many experience a transitional transaction, such as a divestiture, public offering or change in ownership, which are opportunities to generate value and revenue. This article will explore the right strategic planning and priority management that will help companies assess and select a corporate solution that will help them achieve goals and derive value.
The most familiar form of divestiture is a trade sale transaction. This involves a company or a carve-out that is sold to a strategic buyer who wants to harvest financial and operational synergies or a financial buyer who wants to develop or restructure the organization. These are often private equity firms that want to open the business through an initial public offering (IPO). The specific divestiture requirements are usually driven by the buyer’s financing, due diligence or regulatory reporting requirements. Corporate divestitures are typically less operationally onerous unless there are multiple stand-alone operations.
The tax treatment of a divestiture depends on certain factors, such as whether the transaction is a sale of stock or assets. Asset sales can be characterized as a capital or ordinary gain or loss, depending on their nature. The seller’s gain or loss in a stock sale is usually characterized as a capital gain or loss. Corporate divestitures usually take longer than expected. The market will often dictate the deal’s time frame, which could be six to 12 months. Because a divestiture is an exhausting process, the seller should minimize value leakage before the deal is officially marketed.
One-step Equity Spin-off
This usually involves a carve-out entity’s pro rata distribution of stock to the parent company’s shareholders. This essential dividend-off pieces of the company to the existing shareholders. This creates an independent company with its own equity structure. This is used to allow separate pieces of a large business to more easily pursue individual, strategic goals. This could include opportunities to access capital under separate and more favorable terms. After the equity spin is concluded, shareholders may enjoy separate market valuations and borrowing rates that otherwise might not have been available.
A one-step equity spin-off doesn’t raise capital or change the shareholder value for the parent or the spun-off company. The transaction process often takes longer than a corporate divestiture because of the complexities of regulatory filings, tax requirements and operational separation. The latter may involve infrastructure planning challenges and disputes over the spin-off distribution agreement and related operational separation documents. This review process can take several weeks to several months, depending upon the depth and complexity.
Two-step Equity Spin-off
The two-step equity spin-off occurs when the parent company creates a subsidiary from its business, then first offers securities to the public through an IPO. This usually occurs before executing the pro rate distribution to the shareholders. Most companies offer no more than 20 percent of ownership interest. Two-step equity spin-offs are usually undertaken to monetize subsidiary value while retaining operational control and an interest in future value. Companies have historically used these to build stand-alone brand value and fund capital balances of bigger spin-offs before the final separation.
These transactions involve a parent company that extends an exchange offer and offers stockholders the opportunity to exchange their parent company stock for the subsidiary stock. Similar to the one-step equity spin-off, this transaction isn’t designed to raise capital. Once the split has occurred, the subsidiary may raise capital through selling securities, engaging in an IPO or establishing bank credit. The primary difference between a spinoff and a split-off is that the subsidiary’s stock is held by the parent’s stockholders on a non-pro rata basis after the completion for spin-offs.
Split-off does raise the risks of lawsuits and takeovers. Depending on the exit approach, there will be a different tax, reporting and regulatory requirements and timelines. Part two will cover the best practices and strategies for organizations that use multiple strategies at the same time.