Exam 16: Alternative Exit and Restructuring Strategies

When a firm is unable to pay its liabilities as they come due, it is said to be in bankruptcy.

Like divestitures or equity carve-outs, the spin-off generally results in an infusion of cash to the parent company.

For a spin-off to be tax-free to the shareholder it must satisfy which of the following:

A spin-off is tax free to the shareholders if it is properly structured. In contrast, the cash proceeds from an outright sale may be taxable to the parent to the extent a gain is realized.

Which of the following is not true of a spin-off?

AT&T (1984 - 2005)-A POSTER CHILD FOR RESTRUCTURING GONE AWRY Between 1984 and 2000, AT&T underwent four major restructuring programs. These included the government-mandated breakup in 1984, the 1996 effort to eliminate customer conflicts, the 1998 plan to become a broadband powerhouse, and the most recent restructuring program announced in 2000 to correct past mistakes. It is difficult to identify another major corporation that has undergone as much sustained trauma as AT&T. Ironically, a former AT&T operating unit acquired its former parent in 2005. The 1984 Restructure: Changed the Organization But Not the Culture The genesis of Ma Bell's problems may have begun with the consent decree signed with the Department of Justice in 1984, which resulted in the spin-off of its local telephone operations to its shareholders. AT&T retained its long-distance and telecommunications equipment manufacturing operations. Although the breadth of the firm's product offering changed dramatically, little else seems to have changed. The firm remained highly bureaucratic, risk averse, and inward looking. However, substantial market share in the lucrative long-distance market continued to generate huge cash flow for the company, thereby enabling the company to be slow to react to the changing competitive dynamics of the marketplace. The 1996 Restructure: Lack of a Coherent Strategy Cash accumulated from the long-distance business was spent on a variety of ill-conceived strategies such as the firm's foray into the personal computer business. After years of unsuccessfully attempting to redefine the company's strategy, AT&T once again resorted to a major restructure of the firm. In 1996, AT&T spun-off Lucent Technologies (its telecommunications equipment business) and NCR (a computer services business) to shareholders to facilitate Lucent equipment sales to former AT&T operations and to eliminate the non-core NCR computer business. However, this had little impact on the AT&T share price. The 1998 Restructure: Vision Exceeds Ability to Execute In its third major restructure since 1984, AT&T CEO Michael Armstrong passionately unveiled in June of 1998 a daring strategy to transform AT&T from a struggling long-distance telephone company into a broadband internet access and local phone services company. To accomplish this end, he outlined his intentions to acquire cable companies MediaOne Group and Telecommunications Inc. for $58 billion and $48 billion, respectively. The plan was to use cable-TV networks to deliver the first fully integrated package of broadband internet access and local phone service via the cable-TV network. AT&T Could Not Handle Its Early Success During the next several years, Armstrong seemed to be up to the task, cutting sales, general, and administrative expense's share of revenue from 28 percent to 20 percent, giving AT&T a cost structure comparable to its competitors. He attempted to change the bureaucratic culture to one able to compete effectively in the deregulated environment of the post-1996 Telecommunications Act by issuing stock options to all employees, tying compensation to performance, and reducing layers of managers. He used AT&T's stock, as well as cash, to buy the cable companies before the decline in AT&T's long-distance business pushed the stock into a free fall. He also transformed AT&T Wireless from a collection of local businesses into a national business. Notwithstanding these achievements, AT&T experienced major missteps. Employee turnover became a big problem, especially among senior managers. Armstrong also bought Telecommunications and MediaOne when valuations for cable-television assets were near their peak. He paid about $106 billion in 2000, when they were worth about $80 billion. His failure to cut enough deals with other cable operators (e.g., Time Warner) to sell AT&T's local phone service meant that AT&T could market its services only in regional markets rather than on a national basis. In addition, AT&T moved large corporate customers to its Concert joint venture with British Telecom, alienating many AT&T salespeople, who subsequently quit. As a result, customer service deteriorated rapidly and major customers defected. Finally, Armstrong seriously underestimated the pace of erosion in AT&T's long-distance revenue base. AT&T May Have Become Overwhelmed by the Rate of Change What happened? Perhaps AT&T fell victim to the same problems many other acquisitive companies have. AT&T is a company capable of exceptional vision but incapable of effective execution. Effective execution involves buying or building assets at a reasonable cost. Its substantial overpayment for its cable acquisitions meant that it would be unable to earn the returns required by investors in what they would consider a reasonable period. Moreover, Armstrong's efforts to shift from the firm's historical business by buying into the cable-TV business through acquisition had saddled the firm with $62 billion in debt. AT&T tried to do too much too quickly. New initiatives such as high-speed internet access and local telephone services over cable-television network were too small to pick up the slack. Much time and energy seems to have gone into planning and acquiring what were viewed as key building blocks to the strategy. However, there appears to have been insufficient focus and realism in terms of the time and resources required to make all the pieces of the strategy fit together. Some parts of the overall strategy were at odds with other parts. For example, AT&T undercut its core long-distance wired telephone business by offers of free long-distance wireless to attract new subscribers. Despite aggressive efforts to change the culture, AT&T continued to suffer from a culture that evolved in the years before 1996 during which the industry was heavily regulated. That atmosphere bred a culture based on consensus building, ponderously slow decision-making, and a low tolerance for risk. Consequently, the AT&T culture was unprepared for the fiercely competitive deregulated environment of the late 1990s (Truitt, 2001). Furthermore, AT&T created individual tracking stocks for AT&T Wireless and for Liberty Media. The intention of the tracking stocks was to link the unit's stock to its individual performance, create a currency for the unit to make acquisitions, and to provide a new means of motivating the unit's management by giving them stock in their own operation. Unlike a spin-off, AT&T's board continued to exert direct control over these units. In an IPO in April 2000, AT&T sold 14 percent of AT&T's Wireless tracking stock to the public to raise funds and to focus investor attention on the true value of the Wireless operations. Investors Lose Patience Although all of these actions created a sense that grandiose change was imminent, investor patience was wearing thin. Profitability foundered. The market share loss in its long-distance business accelerated. Although cash flow remained strong, it was clear that a cash machine so dependent on the deteriorating long-distance telephone business soon could grind to a halt. Investors' loss of faith was manifested in the sharp decline in AT&T stock that occurred in 2000. The 2000 Restructure: Correcting the Mistakes of the Past Pushed by investor impatience and a growing realization that achieving AT&T's vision would be more time and resource consuming than originally believed, Armstrong announced on October 25, 2000 the breakup of the business for the fourth time. The plan involved the creation of four new independent companies including AT&T Wireless, AT&T Consumer, AT&T Broadband, and Liberty Media. By breaking the company into specific segments, AT&T believed that individual units could operate more efficiently and aggressively. AT&T's consumer long-distance business would be able to enter the digital subscriber line (DSL) market. DSL is a broadband technology based on the telephone wires that connect individual homes with the telephone network. AT&T's cable operations could continue to sell their own fast internet connections and compete directly against AT&T's long-distance telephone business. Moreover, the four individual businesses would create "pure-play" investor opportunities. Specifically, AT&T proposed splitting off in early 2001 AT&T Wireless and issuing tracking stocks to the public in late 2001 for AT&T's Consumer operations, including long-distance and Worldnet Internet service, and AT&T's Broadband (cable) operations. The tracking shares would later be converted to regular AT&T common shares as if issued by AT&T Broadband, making it an independent entity. AT&T would retain AT&T Business Services (i.e., AT&T Lab and Telecommunications Network) with the surviving AT&T entity. Investor reaction was swift and negative. Not swayed by the proposal, investors caused the stock to drop 13 percent in a single day. Moreover, it ended 2000 at 17 ½, down 66 percent from the beginning of the year. The More Things Change The More They Stay The Same On July 10, 2001, AT&T Wireless Services became an independent company, in accordance with plans announced during the 2000 restructure program. AT&T Wireless became a separate company when AT&T converted the tracking shares of the mobile-phone business into common stock and split-off the unit from the parent. AT&T encouraged shareholders to exchange their AT&T common shares for Wireless common shares by offering AT&T shareholders 1.176 Wireless shares for each share of AT&T common. The exchange ratio represented a 6.5 percent premium over AT&T's current common share price. AT&T Wireless shares have fallen 44 percent since AT&T first sold the tracking stock in April 2000. On August 10, 2001, AT&T spun off Liberty Media. After extended discussions, AT&T agreed on December 21, 2001 to merge its broadband unit with Comcast to create the largest cable television and high-speed internet service company in the United States. Without the future growth engine offered by Broadband and Wireless, AT&T's remaining long-distance businesses and business services operations had limited growth prospects. After a decade of tumultuous change, AT&T was back where it was at the beginning of the 1990s. At about $15 billion in late 2004, AT&T's market capitalization was about one-sixth of that of such major competitors as Verizon and SBC. SBC Communications (a former local AT&T operating company) acquired AT&T on November 18, 2005 in a $16 billion deal and promptly renamed the combined firms AT&T. -What were the primary factors contributing to AT&T's numerous restructuring efforts since 1984? How did they differ? How were they similar?

Investors often evaluate a firm’s performance in terms of how well it does as compared to its peers. Activist investors can force an underperforming firm to change its strategy radically. The Kraft decision to split its businesses is yet another example of the recent trend by highly diversified businesses to increase their product focus. _____________________________________________________________________________________________________ Following a successful career as CEO of PepsiCo’s Frito-Lay, Irene Rosenfeld became the CEO of Kraft Foods in 2006. As the world’s second-largest packaged foods manufacturer, behind Nestlé, Kraft had stumbled in its efforts to increase its global reach by growing in emerging markets. Its brands tended to be old, and the firm was having difficulty developing new, trendy products. Rosenfeld was tasked by its board of directors with turning the firm around. She reasoned that it would take a complete overhaul of Kraft, including organization, culture, operations, marketing, branding, and the product portfolio, to transform the firm. In 2010, the firm made what at the time was viewed by top management as its most transformational move by acquiring British confectionery company Cadbury for $19 billion. While the firm became the world’s largest snack company with the completion of the transaction, it was still entrenched in its traditional business, groceries. The company now owned two very different product portfolios. Between January 2010 and mid-2011, Kraft’s earnings steadily improved, powered by stronger sales. Kraft shares rose almost 25%, more than twice the increase in the S&P 500 stock index. However, it continued to trade throughout this period at a lower price-to-earnings multiple than such competitors as Nestlé and Groupe Danone. Some investors were concerned that Kraft was not realizing the promised synergies from the Cadbury deal. Activist investors (Nelson Peltz’s Trian Fund and Bill Ackman’s Pershing Square Capital Management) had discussions with Kraft’s management about splitting the firm. This plan had the support of Warren Buffett, whose conglomerate, Berkshire Hathaway, was Kraft’s largest investor at that time, with a 6% ownership interest. To avert a proxy fight, Kraft’s board and management announced on August 4, 2011, its intention to restructure the firm radically by separating it into two distinct businesses. Coming just 18 months after the Cadbury deal, investors were initially stunned by the announcement but appeared to avidly support the proposal avidly by driving up the firm’s share price by the end of the day. The proposal entailed separating its faster-growing global snack food business from its slower-growing, more United States–centered grocery business. The separation was completed through a tax-free spin-off to Kraft Food shareholders of the grocery business on October 1, 2012. The global snack food business will be named Mondelez International, while the North American grocery business will retain the Kraft name. Management justified the proposed split-up of the firm as a means of increasing focus, providing greater opportunities, and giving investors a choice between the faster-growing snack business and the slower-growing but more predictable grocery operation. Management also argued that the Cadbury acquisition gave the snack business scale to compete against such competitors as Nestlé and PepsiCo. -How might a spin-off create shareholder value for Kraft Foods shareholders?

Many corporations, particularly large, highly diversified organizations, constantly are reviewing ways in which they can enhance shareholder value by changing the composition of their assets, liabilities, equity, and operations.

In a spin-off, the proportional ownership of shares in the new legal subsidiary is the same as the stockholders' proportional ownership of shares in the parent firm.

The Warner Music Group is Sold at Auction In selling a business, a firm may choose either to negotiate with a single potential buyer, to control the number of potential bidders, or to engage in a public auction. The auction process often is viewed as the most effective way to get the highest price for a business to be sold; however, far from simple, an auction can be both a chaotic and a time-consuming procedure. Auctions may be most suitable for businesses whose value is largely intangible or for “hard-to-value” businesses. ____________________________________________________________________________________________________ In early 2011, the Warner Music Group (WMG), the third largest of the “big four” recorded-music companies, consisted of two separate businesses: one showing high growth potential and the other with declining revenues. Of WMG’s $3 billion in annual revenue, 82% came from sales of recorded music, with the remainder attributed to royalty payments for the use of music owned by the firm. Of the two, only recorded music has suffered revenue declines, due to piracy, aggressive pricing of online music sales, and the bankruptcy of many record retailers and wholesalers. In contrast, music publishing has grown as a result of diverse revenue streams from radio, television, advertising, and other sources. Music publishing also is benefiting from digital music downloads and the proliferation of cellphone ringtones. In 2004, Warner Music’s parent at the time, Time Warner Inc., agreed to sell the business to a consortium led by THL Partners for $2.6 billion in cash. The group also included Edward Bronfman, Jr. (the Seagram’s heir, who also became the CEO of WMG), Bain Capital, and Providence Equity Partners. Having held the firm for seven years, a long time for private equity investors, its primary investors were seeking a way to cash out of the business, whose long-term fortunes appeared problematic. WMG’s investors were also in a race with Terra Firma Capital Partners, owner of the venerable British record company EMI, which was expected to take EMI public or to sell the business to a strategic buyer. WMG’s investors were concerned that, if EMI were to be sold before WMG, the firm’s exit strategy would be compromised, because there was much speculation that the only logical buyer for WMG was EMI. By the end of January 2011, WMG had solicited about 70 potential bidders and attracted unsolicited indications of interest from at least 20 others. As this group winnowed through the auction’s three rounds, alliances among the bidders continually changed. In the ensuing auction, WMG’s stock price jumped by 75% from $4.72 per share on January 20 to $8.25 per share, for a total market value of $3.3 billion on May 6, 2011. In view of the differences between these two businesses, WMG was open to selling the firm in total or in pieces, contributing to the extensive bidder interest. Risk takers were betting on an eventual recovery in recorded-music sales, while risk-averse investors were more likely to focus on music publishing. Prior to the auction, WMG distributed confidentiality agreements to 37 suitors, with 10 actually submitting a preliminary bid by the deadline of February 22, 2011. Of the preliminary bids, four were for the entire company, three for recorded music, and three for music publishing. For the entire firm, prices ranged from a low bid of $6 per share to a high bid of $8.25 per share. For recorded music, bids ranged from a low of $700 million to a high of $1.1 billion. Music publishing bids were almost twice that of recorded music, ranging from a low of $1.45 billion to a high of $2 billion. For bidders, the objective is to make it to the next round in the auction; for sellers, the objective is less about prices offered during the initial round and more about determining who is committed to the process and who has the financial wherewithal to consummate the deal. According to the firm’s proxy pertaining to the sale, released on May 20, 2011, the subsequent bidding was characterized as a series of ever-changing alliances among bidders, with Access Industries submitting the winning bid. The sale appears to have been a success from the investors’ standpoint, with some speculating that THL alone earned an internal rate of return (including dividends) of 34%. Motorola Bows to Activist Pressure Under pressure from activist investor Carl Icahn, Motorola felt compelled to make a dramatic move before its May 2008 shareholders' meeting. Icahn had submitted a slate of four directors to replace those up for reelection and demanded that the wireless handset and network manufacturer take actions to improve profitability. Shares of Motorola, which had a market value of $22 billion, had fallen more than 60% since October 2006, making the firm’s board vulnerable in the proxy contest over director reelections. Signaling its willingness to take dramatic action, Motorola announced on March 26, 2008, its intention to create two independent, publicly traded companies. The two new companies would consist of the firm's former Mobile Devices operation (including its Home Devices businesses consisting of modems and set-top boxes) and its Enterprise Mobility Solutions & Wireless Networks business. In addition to the planned spin-off, Motorola agreed to nominate two people supported by Carl Icahn to the firm’s board. Originally scheduled for 2009, the breakup was postponed due to the upheaval in the financial markets that year. The breakup would result in a tax-free distribution to Motorola's shareholders, with shareholders receiving shares of the two independent and publicly traded firms. The Mobile Devices business designs, manufactures, and sells mobile handsets globally, and it has lost more than $5 billion during the last three years. The Enterprise Mobility Solutions & Wireless Networks business manufactures, designs, and services public safety radios, handheld scanners and telecommunications network gear for businesses and government agencies and generates nearly all of the Motorola’s current cash flow. This business also makes network equipment for wireless carriers such as Spring Nextel and Verizon Wireless. By dividing the company in this manner, Motorola would separate its loss-generating Mobility Devices division from its other businesses. Although the third largest handset manufacturer globally, the handset business had been losing market share to Nokia and Samsung Electronics for years. Following the breakup, the Mobility Devices unit would be renamed Motorola Mobility, and the Enterprise Mobility Solutions & Networks operation would be called Motorola Solutions. Motorola’s board is seeking to ensure the financial viability of Motorola Mobility by eliminating its outstanding debt and through a cash infusion. To do so, Motorola intends to buy back nearly all of its outstanding $3.9 billion debt and to transfer as much as $4 billion in cash to Motorola Mobility. Furthermore, Motorola Solutions would assume responsibility for the pension obligations of Motorola Mobility. If Motorola Mobility were to be forced into bankruptcy shortly after the breakup, Motorola Solutions may be held legally responsible for some of the business’s liabilities. The court would have to prove that Motorola had conveyed the Mobility Devices unit (renamed Motorola Mobility following the breakup) to its shareholders, fraudulently knowing that the unit’s financial viability was problematic. Once free of debt and other obligations and flush with cash, Motorola Mobility would be in a better position to make acquisitions and to develop new phones. It would also be more attractive as a takeover target. A stand-alone firm is unencumbered by intercompany relationships, including such things as administrative support or parts and services supplied by other areas of Motorola. Moreover, all liabilities and assets associated with the handset business already would have been identified, making it easier for a potential partner to value the business. In mid-2010, Motorola Inc. announced that it had reached an agreement with Nokia Siemens Networks, a Finnish-German joint venture, to buy the wireless networks operations, formerly part of its Enterprise Mobility Solutions & Wireless Network Devices business for $1.2 billion. On January 4, 2011, Motorola Inc. spun off the common shares of Motorola Mobility it held as a tax-free dividend to its shareholders and renamed the firm Motorola Solutions. Each shareholder of record as of December 21, 2010, would receive one share of Motorola Mobility common for every eight shares of Motorola Inc. common stock they held. Table 15.3 shows the timeline of Motorola’s restructuring effort. Discussion Questions 1. In your judgment, did the breakup of Motorola make sense? Explain your answer. 2. What other restructuring alternatives could Motorola have pursued to increase shareholder value? Why do you believe it pursued this breakup strategy rather than some other option? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Table 15.3}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Motorola Restructure Timeline}$ Motorola (Beginning 2010) Motorola (Mid-2010) Motorola (Beginning 2011) Mobility Devices Mobility Devices Motorola Mobility spin-off Enterprise Mobility Solutions \& Wireless Networks Enterprise Mobility Solutions* Motorola Inc. renamed Motorola Solutions $\text {*Wireless Networks sold to Nokia-Siemens. }$ Kraft Foods Undertakes Split-Off of Post Cereals in Merger-Related Transaction In August 2008, Kraft Foods announced an exchange offer related to the split-off of its Post Cereals unit and the closing of the merger of its Post Cereals business into a wholly-owned subsidiary of Ralcorp Holdings. Kraft is a major manufacturer and distributor of foods and beverages; Post is a leading manufacturer of breakfast cereals; and Ralcorp manufactures and distributes brand-name products in grocery and mass merchandise food outlets. The objective of the transaction was to allow Kraft shareholders participating in the exchange offer for Kraft Sub stock to become shareholders in Ralcorp and Kraft to receive almost $1 billion in cash or cash equivalents on a tax-free basis. Prior to the transaction, Kraft borrowed $300 million from outside lenders and established Kraft Sub, a shell corporation wholly owned by Kraft. Kraft subsequently transferred the Post assets and associated liabilities, along with the liability Kraft incurred in raising $300 million, to Kraft Sub in exchange for all of Kraft Sub’s stock and $660 million in debt securities issued by Kraft Sub to be paid to Kraft at the end of ten years. In effect, Post was conveyed to Kraft Sub in exchange for assuming Kraft’s $300 million liability, 100% of Kraft Sub’s stock, and Kraft Sub debt securities with a principal amount of $660 million. The consideration that Kraft received, consisting of the debt assumption by Kraft Sub, the debt securities from Kraft Sub, and the Kraft Sub stock, is considered tax free to Kraft, since it is viewed simply as an internal reorganization rather than a sale. Kraft later converted to cash the securities received from Kraft Sub by selling them to a consortium of banks. In the related split-off transaction, Kraft shareholders had the option to exchange their shares of Kraft common stock for shares of Kraft Sub, which owned the assets and liabilities of Post. If Kraft was unable to exchange all of the Kraft Sub common shares, Kraft would distribute the remaining shares as a dividend (i.e., spin-off) on a pro rata basis to Kraft shareholders. With the completion of the merger of Kraft Sub with Ralcorp Sub (a Ralcorp wholly-owned subsidiary), the common shares of Kraft Sub were exchanged for shares of Ralcorp stock on a one for one basis. Consequently, Kraft shareholders tendering their Kraft shares in the exchange offer owned 0.6606 of a share of Ralcorp stock for each Kraft share exchanged as part of the split-off. Concurrent with the exchange offer, Kraft closed the merger of Post with Ralcorp. Kraft shareholders received Ralcorp stock valued at $1.6 billion, resulting in their owning 54% of the merged firm. By satisfying the Morris Trust tax code regulations, the transaction was tax free to Kraft shareholders. Ralcorp Sub was later merged into Ralcorp. As such, Ralcorp assumed the liabilities of Ralcorp Sub, including the $660 million owed to Kraft. The purchase price for Post equaled $2.56 billion. This price consisted of $1.6 billion in Ralcorp stock received by Kraft shareholders and $960 million in cash equivalents received by Kraft. The $960 million included the assumption of the $300 million liability by Kraft Sub and the $660 million in debt securities received from Kraft Sub. The steps involved in the transaction are described -Kraft CEO Irene Rosenfeld argued that an important justification for the Cadbury acquisition in 2010 was to create two portfolios of businesses: some very strong cash generating businesses and some very strong growth businesses in order to increase shareholder value. How might this strategy have boosted the firm's value?

The divestiture of a business always results in the parent receiving cash from the buyer?

Which of the following is not a characteristic of a spin-off?

Parent firms often exit businesses that consistently fail to meet or exceed the parent's hurdle rate requirements.

The decision to sell or to retain the business depends on a comparison of the pre-tax value of the business to the parent with the after-tax proceeds from the sale of the business.

The divesting firm is required to recognize a gain or loss for financial reporting purposes equal to the difference between the book value of the consideration received for the divested operation and its fair value.

Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and bust-ups are commonly used strategies to exit businesses and to redeploy corporate assets by returning cash or noncash assets through a special dividend to shareholders.

Gillette Announces Divestiture Plans With 1998 sales of $10.1 billion, Gillette is the world leader in the production of razor blades, razors, and shaving cream. Gillette also has a leading position in the production of pens and other writing instruments. Gillette's consolidated operating performance during 1999 depended on its core razor blade and razor, Duracell battery, and oral care businesses. Reflecting disappointment in the performance of certain operating units, Gillette's CEO, Michael Hawley, announced in October 1999 his intention to divest poorly performing businesses unless he could be convinced by early 2000 that they could be turned around. The businesses under consideration at that time comprised about 15% of the company's $10 billion in annual sales. Hawley saw the new focus of the company to be in razor blades, batteries, and oral care. To achieve this new focus, Hawley intended to prune the firm's product portfolio. The most likely targets for divestiture at the time included pens (i.e., PaperMate, Parker, and Waterman), with the prospects for operating performance for these units considered dismal. Other units under consideration for divestiture included Braun and toiletries. With respect to these businesses, Hawley apparently intended to be selective. At Braun, where overall operating profits plunged 43% in the first three quarters of 1999, Hawley has announced that Gillette will keep electric shavers and electric toothbrushes. However, the household and personal care appliance units are likely divestiture candidates. The timing of these sales may be poor. A decision to sell Braun at this time would compete against Black & Decker's recently announced decision to sell its appliance business. Although Gillette would be smaller, the firm believes that its margins will improve and that its earnings growth will be more rapid. Moreover, divesting such problem businesses as pens and appliances would let management focus on the units whose prospects are the brightest. These are businesses that Gillette's previous management was simply not willing to sell because of their perceived high potential. -Comment on the timing of the sale.

An equity carve-out differs from a spin-off for all but which one of the following reasons?

Which one of the following is generally not a reason for issuing tracking stocks?

Anatomy of a Spin-Off On October 18, 2006, Verizon Communication's board of directors declared a dividend to the firm's shareholders consisting of shares in a company comprising the firm's domestic print and Internet yellow pages directories publishing operations (Idearc Inc.). The dividend consisted of 1 share of Idearc stock for every 20 shares of Verizon common stock. Idearc shares were valued at $34.47 per share. On the dividend payment date, Verizon shares were valued at $36.42 per share. The 1-to-20 ratio constituted a 4.73% yield—that is, $34.47/ ($36.42 × 20)—approximately equal to Verizon's then current cash dividend yield. Because of the spin-off, Verizon would contribute to Idearc all its ownership interest in Idearc Information Services and other assets, liabilities, businesses, and employees currently employed in these operations. In exchange for the contribution, Idearc would issue to Verizon shares of Idearc common stock to be distributed to Verizon shareholders. In addition, Idearc would issue senior unsecured notes to Verizon in an amount approximately equal to the $9 billion in debt that Verizon incurred in financing Idearc's operations historically. Idearc would also transfer $2.5 billion in excess cash to Verizon. Verizon believed it owned such cash balances, since they were generated while Idearc was part of the parent. Verizon announced that the spin-off would enable the parent and Idearc to focus on their core businesses, which may facilitate expansion and growth of each firm. The spin-off would also allow each company to determine its own capital structure, enable Idearc to pursue an acquisition strategy using its own stock, and permit Idearc to enhance its equity-based compensation programs offered to its employees. Because of the spin-off, Idearc would become an independent public company. Moreover, no vote of Verizon shareholders was required to approve the spin-off, since it constitutes the payment of a dividend permissible by the board of directors according to the bylaws of the firm. Finally, Verizon shareholders have no appraisal rights in connection with the spin-off. In late 2009, Idearc entered Chapter 11 bankruptcy because it was unable to meet its outstanding debt obligations. In September 2010, a trustee for Idearc’s creditors filed a lawsuit against Verizon, alleging that the firm breached its fiduciary responsibility by knowingly spinning off a business that was not financially viable. The lawsuit further contends that Verizon benefitted from the spin-off at the expense of the creditors by transferring $9 billion in debt from its books to Idearc and receiving $2.5 billion in cash from Idearc. -Do you believe shareholders should have the right to approve a spin-off? Explain your answer?