Divestitures

• Definitions– Divestiture

• Sale of segment of a company to a third party• Sale for cash or securities or some combination

thereof• Assets revalued for purpose of future depreciation

by the buyer

– Spin-off• Company distributes on a pro rata basis all shares it

owns in a subsidiary to its own shareholders• Two separate public corporations with initially same

proportional equity ownership now exist • No money changes hands• Subsidiary's assets are not revalued• Transaction treated as a stock dividend• Transaction is a tax-free exchange

– Split-off – shares in subsidiary in lieu of shares in parent

– Equity carve-outs• Some of subsidiary's shares are offered for sale to general

public• Bring infusion of cash to parent firm without loss of control• Often sell up to 20% in IPO, later spin off of remainder of shares

– Split-ups• Two or more new companies come into being in place of

original company • Usually accomplished by spin-offs

Diverse Motives for Divestitures

• Dismantling segments of conglomerates which had higher values as independent operations or better fit with other firms

• Sale of original business due to changing opportunities or circumstances

• Change in strategic focus which may reflect realignment with firm's changing environments

• Adding value by selling into a better fit• Firm is unable or unwilling to make additional investments

to remain in a business• Harvesting past successes to make resources available for

developing other opportunities• Discarding unwanted businesses from prior acquisitions to

value-increasing buyer• Divestiture to finance major acquisitions or LBOs• Divestiture used as a takeover defense by selling off "crown

jewel" • Divestiture to obtain government approval of a combination

of segments with competing products

• Corporate sale of divisions or business units to operating managements

• Divestiture of unrelated divisions to focus on core businesses• Divestiture of low margin product lines to improve margins

and profitability • Divestiture to finance another firm• Divestiture to reverse prior mistakes• Divestiture of businesses after learning more about them

Divestiture process• Most divestitures proceed through the following steps:• Working with the owner(s) or management team and key advisors, we identify the goals

desired in a sale. During this stage, we confer with other advisors (e.g., attorneys and CPAs) to be sure that legal and personal financial considerations are taken into account.

• We prepare a valuation -- a detailed analysis of the value that should be achieved in a sale. We review this with the seller and affirm the decision to go forward.

• Using our network of industry contacts, we develop a targeted list of potential acquirers and review it with the seller. We contact prospective buyers by telephone and screen them for interest. Even if preliminary discussions are already underway with one prospective buyer, we have usually found it to be in the seller's best interest to solicit additional buyers.

• We require prospective buyers to sign confidentiality agreements before receiving proprietary information. When necessary, we will negotiate the terms of these agreements with buyer counsel.

• While the buyer contact process is underway, we prepare a detailed information package referred to as an offering memorandum. It includes financial information (historical and projected) along with a description of the company's markets, clients, competition, staff, facilities, and other resources. The offering memorandum is designed to contain enough information for a prospective buyer to make a bid decision.

• We follow up with the offering memorandum recipients to assess their interest, provide additional information as necessary, and arrange for site visits or "chemistry meetings" between the seller and prospective buyer executives.

Divestiture process….• We conduct initial negotiations with prospective buyers, with the objective of obtaining

satisfactory offers. We make recommendations on the form and terms of the sale based on analysis and evaluation of the offers received, as well as on tax issues that come to our attention. When both parties are in agreement on the main points of the business deal, a letter of intent (usually non-binding) is prepared and signed.

• Once the letter of intent is signed, attorneys typically begin drafting the final sale contract. At the same time, accountants or buyer financial staff conduct a detailed "due diligence" investigation of the seller's financial condition. We advise the seller and his or her professionals during this process.

• We make recommendations on selling executives' salary arrangements.• We assist with any negotiations or financial issues that arise prior to closing.• While this is the most typical pattern, every transaction is different. Depending upon the

circumstances and the needs of sellers and buyers, some of these steps may be omitted or occur simultaneously.

• Throughout the process, our goal is to assure clear communication and identification of all key issues, so that no problems surface at the last minute to delay or kill the deal.

Friendly takeovers

• Before a bidder makes an offer for another company, it usually first informs that company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.

• In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the shareholders to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the acquisition of a public company.

Hostile takeovers

• A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand.

• A hostile takeover can be conducted in several ways. - A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. Tender offers in the USA are regulated with the Williams Act. - An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover. - Another method involves quietly purchasing enough stock on the open market, known as a creeping tender offer, to effect a change in management. In all of these ways, management resists the acquisition but it is carried out anyway.

• The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company. It can find out exactly what it is taking on before it makes a commitment. But a hostile bidder knows about the target by only the information that is publicly available, and so takes a greater risk. Also, banks are less willing to back hostile bids with the loans that are usually needed to finance the takeover. However, some investors may proceed with hostile takeovers because they are aware of mismanagement by the board and are trying to force the issue into public and potentially legal scrutiny

Perceived pros and cons of takeover

Pros:• Increase in sales/revenues (e.g. Procter & Gamble takeover of Gillette)• Venture into new businesses and markets• Profitability of target company• Increase market share• Decrease competition (from the perspective of the acquiring company)• Reduction of overcapacity in the industry• Enlarge brand portfolio (e.g. L'Oréal's takeover of Bodyshop)• Increase in economies of scale• Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping

responsibilities can be eliminated, decreasing operating costs)Cons:• Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers,

although this is good for the companies involved in the takeover)• Likelihood of job cuts.• Cultural integration/conflict with new management• Hidden liabilities of target entity.• The monetary cost to the company.

Takeover defences• Back-end• Bankmail• Crown Jewel Defense• Flip-in• Golden Parachute• Greenmail• Jonestown Defense• Lock-up provision• Non-voting stock• Pac-Man Defense

• Poison pill• Scorched earth defense• Staggered board of directors• White knight• White squire• Whitemail

Necessity of Takeover Code • The confidence of retail investors in the capital market is a crucial

factor for its development. Therefore, their interest needs to be protected.

• An exit opportunity shall be given to the investors if they do not want to continue with the new management.

• Full and truthful disclosure shall be made of all material information relating to the open offer so as to take an informed decision.

• The acquirer shall ensure the sufficiency of financial resources for the payment of acquisition price to the investors.

• The process of acquisition and mergers shall be completed in a time bound manner.

• Disclosures shall be made of all material transactions at earliest opportunity.

International Application Areas of

comparisonIndia Hong Kong Australia U.K Malaysia USA Singapore

Are takeovers  regulated

Yes Yes Yes Yes Yes Yes Yes

Who Regulates SEBI SFC SIC FSA Securities Commission,

Malaysia

Securities and Exchange

Commission (SEC)

Securities Industry Council

Threshold limit (Initial

Acquisition)

15% 35% 20% 30% 33% Offers are only voluntary

30% or 1% creeping

between 30% to 50%

Creeping Acquisition limit (subsequent acquisitions for consolidation of holdings)

5% for shareholders

holding 15% to 75%

5% for shareholders

holding 35% to 50%

3%in 6 months

No 2% in 6 months No 1% in 6 months for shareholders holding shares between 30%

and 50%

Concept of Control

No % specified for acquisition of

control. Definition of acquisition of

control includes power to

appoint majority of directors and control major

policy decisions.

35% or more 20% 30% 33% or more No 30% or more

Public announcement

To be made To be made To be made To be made To be made To be made To be made

Letter of offer To be sent To be sent Target response statement to be

sent

To be sent To be sent To be sent. To be sent.

Offer size Minimum 20% of the voting

share capital of the target company

Acceptance conditional at

50%

Not specified For balance shares

Not specified As much as 5% called “Tender

Offers”Less than – ‘Mini

tender offer’

 

Overview of Takeover Regulations

• “Takeover” is a transaction whereby a person (individual, group of individuals or company) acquires control over the assets of the company either:

- directly by becoming the owner of those assets; or - indirectly by obtaining control of the management of the company .

• Takeover can be of a listed or an Unlisted company• In case of Takeover of an Unlisted and closely held company – Companies Act,

1956 to apply.• In case of Takeover of a listed company, the following legal framework to apply:

Overview of Takeover Regulations (Cont’d.)

- SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 issued by the Securities and Exchange Board of India (SEBI);

- Companies Act, 1956; and

- Listing Agreement

• “Take Over” – taking over the control of management

• “Substantial acquisition of shares or voting Rights”- acquiring substantial quantity of shares or voting rights

• SEBI Regulations for the first time introduced in 1994, but found inadequate to control hostile takeovers or regulate competitive offers and revision of offers.