Important Implications In The Process Of Spin Offs Finance Essay - Free Essay Example

Sample details Pages: 3 Words: 999 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? A spin offs occur when a company distributes all the common shares it owns in a controlled subsidiary to its existing share holders, thereby creating a separate public company. This type of divestiture is in contrast to a sell, where divested asset are purchased and become part of another firm. This firm paper examine the effect of a voluntary (as opposed to court-ordered) spin-off on the wealth level of share holders. Overall organization structure Review the as is overall organization structure including Don’t waste time! Our writers will create an original "Important Implications In The Process Of Spin Offs Finance Essay" essay for you Create order a. Hierarchical structure b. roles c. responsibilities c. Functions d. related policies and procedures Develop a new structure that will: a. Speedily decision making processes b. Focus on risk, business c. Separate risk generation and risk control d. Distinguish between supporting/shared services units and revenue generating units Some Important Implications The process of a spin-off starts with organizational restructuring that means preparing the internal separation such as business processes, reporting lines etc. The process depends on the pre-transaction structure of the parent firm; whether there is a group structure with separate legal entities, or whether there is only one legal entity organized according to Strategic Business Units. Problems in Restructuring Transactions One can differentiate between voluntary and mandatory public ownership restructuring transactions, whereas voluntary are much more frequent than mandatory transactions (Achleitner and Wahl, 2003). Barriers for restructuring transactions are only relevant to voluntary transactions. In mandatory transactions, the firm is obliged to act due to legal or regulatory reasons such as anti-trust laws (Kudla and McInish, 1983). Quasi-mandatory transactions are those where management intends to free up a parent or a subsidiary from the others regulatory or legal burden (McKenna, 2000). Krishna swami and Subramaniam (1999) As, Krishna swami and Subramaniam Investigate on the impact of the regulatory status of spin-offs on the announcement effect and find no significant influence. On The Other Hand S chipper and Smith S chipper and Smith (1983) on the other hand show that the announcement effect is slightly bigger for spin-offs associated with regulatory or tax advantages. They conclude that relaxing regulatory or tax constraints can hence be a source of shareholder gains in spin-offs. More than 75% of divestitures are reactive and often extrinsically motivated (Achleitner and Wahl, 2003; Dranikoff, Koller, and Schneider, 2002). This may be a result from the fact that many firms have a strong bias against divestitures. They divest businesses only reactive to: (1) pressure from the capital markets (Berger and Ofek, 1999) especially takeover threats, negative analysts reports, pressure from blockholders (Bethel and Lie-beskind, 1993), or poor stock market performance (Jain, 1985); (2) Poor operating performance such as heavy losses; or (3) A parent companys large debt burden (Berger and Ofek, 1999). Boards may also try to avoid divestitures and keep on holding businesses long after the divestiture is appropriate, in an attempt to avoid creating an image of failure or weakness (Caytas and Mahari, 1988). Timing Analyzing the impact of the various timing factors on the announcement effect shows that there is a significant influence of market timing on the announcement effect: (1) Parents two years raw return before the transaction; 2) Price multiples of the parent firm before and following the transaction; (3) The profitability of the parent firm in the year following the transaction; and (4) The parents earnings growth following the transaction; all have significant influence on announcement. Comparative RatiosÂÂ   The following are two examples of the many comparative metrics on which acquiring companiesÂÂ  may base their offers: A company can make an offer by the help of earning per share and this is a multiple of earning for the target companies. And so stocks of the same company by looking at its price earning will give the acquiring company a good direction for what its target price earning multiple should be Enterprise-Value-to-SalesÂÂ  RatioÂÂ  (EV/Sales)ÂÂ   With the use of this ratio, the acquiring company makes an offer a various form of the revenues, again, while being aware of theÂÂ  price-to-sales ratioÂÂ  of other companies in the industry. Replacement CostÂÂ   In a few cases, acquisitions are based on the cost of replacing the target company. For plainnesss sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to together good management, acquire property and get the right equipment. This method of establishing a price certainly would not make much sense in a service industry where the key assets people and ideas are hard to value and develop. Discounted Cash FlowÂÂ  (DCF) -ÂÂ  discounted cash flow analysis determines a companys current value according to its estimated future cash flows. Anticipated free cash flows (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes change in working capital) are discounted to a present value using the companysÂÂ  weighted average costs of capitalÂÂ  (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. Competitive Environment Foreign banks provide a very competitive environment to the domestic commercial banks and have become an important part of the banking industry. Although, foreign banks are not allowed to open more than four branches, they have better managerial skills and more access to the international financial markets. As a result, they receive the bulk of the foreign currency deposits. This rapid development of banking industry in Pakistan increased the informational irregularity and agency cost problems and necessitated the need for corporate governance. Modes of Restructuring Financial restructuring Asset restructuring Sell-offs versus Spin-offs Spin-off Spin-off represents a pro-rata distribution of shares of a subsidiary to shareholders. Occurs within the hierarchy. Terms and valuation of the assets are set internally Parent stockholders create new board. Parent can maintain ties with spin-off unit. Sell-offs Sell-offs: Assets are sold to another firm for cash and/or securities. Occurs outside the hierarchy. Value determined by market forces. Acquiring firm absorbs and governs the sold-off assets a part of its hierarchy.