Question 1

Hewlett Packard (HP) announced the spin-off of its Agilent Technologies unit to focus on its main business of computers and printers, where sales have been lagging behind such competitors as Sun Microsystems. Agilent makes test, measurement, and monitoring instruments; semiconductors; and optical components. It also supplies patient-monitoring and ultrasound-imaging equipment to the health care industry. HP will retain an 85% stake in the company. The cash raised through the 15% equity carve-out will be paid to HP as a dividend from the subsidiary to the parent. Hewlett Packard will provide Agilent with $983 million in start-up funding. HP retained a controlling interest until mid-2000, when it spun-off the rest of its shares in Agilent to HP shareholders as a tax-free transaction.
-Discuss the conditions under which this spin-off would constitute a tax-free transaction.

Accepted Answer

The answer of Hewlett Packard (HP) announced the spin-off of...

Question 2

Antitrust regulatory agencies may make their approval of a merger contingent on the willingness of the merger partners to divest certain businesses.

Accepted Answer

A) True 
 B)False

Question 3

Speculate as to why Northrop Grumman used a spin-off rather than a divestiture, split-off or split up to separate Huntington Ingalls from the rest of its operations? What were the advantages of the spin-off over the other restructuring strategies.

Accepted Answer

The answer of Speculate as to why Northrop Grumman used...

Question 4

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.
-Which of the major restructuring motives discussed in this chapter seem to be a work in this business case? Explain your answer.

Accepted Answer

The answer of Gillette Announces Divestiture Plans
With 1998 sales of...

Question 5

Hewlett Packard (HP) announced the spin-off of its Agilent Technologies unit to focus on its main business of computers and printers. Hewlett Packard provided Agilent with $983 million in start-up funding. HP retained a controlling interest until mid-2000, when it spun-off the rest of its shares in Agilent to HP shareholders as a tax-free transaction. Discuss the reasons why HP may have chosen a staged transaction rather than an outright divestiture of the business.

Accepted Answer

The answer of  Hewlett Packard (HP) announced the spin-off...

Question 6

The Anatomy of a Reverse Morris Trust Transaction:
The Pringles Potato Chip Saga

Greater shareholder value may be created by exiting rather than operating a business.
Deal structures can impose significant limitations on a firm’s future strategies and tactics.
_____________________________________________________________________________________________

Following a rigorous portfolio review and an informal expression of interest in the Pringles brand by Diamond Foods (Diamond) in late 2009, Proctor & Gamble (P&G), the world’s leading manufacturer of household products, believed that Pringles could be worth more to its shareholders if divested than if retained. Pringles is the iconic potato chip brand, with sales in 140 countries and operations in the United States, Europe, and Asia.

Diamond’s executive management had long viewed the Pringles’ brand as an attractive fit for their strategy of building, acquiring, and energizing brands. The acquisition of Pringles would triple the size of the firm’s snack business and provide greater merchandising influence in the way in which its products are distributed. The merger would also give Diamond a substantial presence in Asia, Latin America, and Central Europe. The increased geographic diversity means the firm would derive almost one-half of its revenue from international sales.

After extended negotiations, Diamond and P&G announced on April 15, 2011, their intent to merge P&G’s Pringles subsidiary into Diamond in a transaction valued at $2.35 billion. The purchase price consisted of $1.5 billion in Diamond common stock, valued at $51.47 per share, and Diamond’s assumption of $850 million in Pringles outstanding debt. The way in which the deal was structured enabled P&G shareholders to defer any gains they realize from the transaction and resulted in a one-time after-tax earnings increase for P&G of $1.5 billion due to the firm’s low tax basis in Pringles.

The offer to exchange Pringle shares for P&G shares reduced the number of outstanding P&G common shares, partially offsetting the impact on P&G’s earnings per share of the loss of Pringles earnings. Diamond agreed to issue one share of its common stock for each Pringles common share. The 29.1 million common shares issued by Diamond resulted in P&G shareholders’ participating in the exchange offer, owning a 57% stake in the combined firms, with Diamond’s shareholders owning the remainder.

The deal was structured as a reverse Morris Trust acquisition, which combines a divisive reorganization (e.g., a spin-off or a split-off) with an acquisitive reorganization (e.g., a statutory merger) to allow a tax-free transfer of a subsidiary under U.S. law. The use of a divisive reorganization results in the creation of a public company that is subsequently merged into a shell subsidiary (i.e., a privately owned company) of another firm, with the shell surviving.

The structure of the deal involved four discrete steps, outlined in separation and transaction agreements signed by P&G and Diamond. These steps included the following: (1) the creation by P&G of a wholly owned subsidiary containing Pringles’ assets and liabilities; (2) the recapitalization of the wholly owned Pringles subsidiary; (3) the separation of the wholly owned subsidiary through a split-off exchange offer; and (4) a merger with a wholly owned subsidiary of Diamond Foods. The separation agreement covered the first three steps, with the final step detailed in the transaction agreement.

Under the separation agreement, P&G contributed certain Pringles assets and liabilities to the Pringles Company, a newly formed wholly owned subsidiary of P&G. After P&G and Diamond reached a negotiated value for the Pringles Company equity of $1.5 billion, or $51.47 per share, the Pringles Company was subsequently recapitalized by issuing to P&G 29.1 million shares of Pringles Company stock. To complete the separation of Pringles from the parent firm, P&G distributed on the closing date Pringles shares to P&G shareholders participating in a share-exchange offer in which they agreed to exchange their P&G shares for Pringles shares.

In addition, the Pringles Company borrowed $850 million and used the proceeds to pay P&G a cash dividend and to acquire certain Pringles business assets held by P&G affiliates. Since P&G is the sole owner of the Pringles Company, the dividend is tax free to P&G because it is an intracompany transfer. If the exchange offer had not been fully subscribed, P&G would have distributed through a tax-free spin-off the remaining shares as a dividend to P&G shareholders.

The transaction agreement outlined the terms and conditions pertinent to completion of the merger with Diamond Foods. Immediately after the completion of the distribution, the Pringles Company merged with Merger Sub, a wholly owned shell subsidiary of Diamond, with Merger Sub’s continuing as the surviving company. The shares of Pringles Company common stock distributed in connection with the split-off exchange offer automatically converted into the right to receive shares of Diamond common stock on a one-for-one basis. After the merger, Diamond, through Merger Sub, owned and operated Pringles

Prior to the merger, Diamond already had formidable antitakeover defenses in place as part of its charter documents, including a classified board of directors, a prohibition against stockholders’ taking action by written consent (i.e., consent solicitation), and a requirement that stockholders give advance notice before raising matters at a stockholders’ meeting. Following the merger, Diamond adopted a shareholder-rights plan. The plan entitled the holder of such rights to purchase 1/100 of a share of Diamond’s Series A Junior Participating Preferred Stock if a person or group acquires 15% or more of Diamond’s outstanding common stock. Holders of this preferred stock (other than the person or group triggering their exercise) would be able to purchase Diamond common shares (flip-in poison pill) or those of any company into which Diamond is merged (flip-over poison pill) at a price of $60 per share. Such rights would expire in March 2015 unless extended by Diamond’s board of directors.
-The merger of Pringles and Diamond Foods could have been achieved as a result of a P&G spin-off of Pringles. Explain the details of how this might happen.

Accepted Answer

The answer of The Anatomy of a Reverse Morris Trust...

Question 7

A spin-off may create shareholder wealth for all of the following reasons except for

Accepted Answer

A)  Spin-offs are generally not taxable if properly structured 
B)  The spin-off's management and board is independent of the former parent 
C)  Investors will be better able to value the spin-off 
D)  The cost of capital of the spin-off is generally higher than when it was part of the parent 
E)  The spin-off may be subsequently acquired by another firm

Question 8

Although the parent retains control, the shareholder base of the subsidiary that has undergone an equity carve-out is unlikely to be different than that of the parent as a result of the public sale of equity.

Accepted Answer

A) True 
 B)False

Question 9