Question 1

How might the form of payment affect the abnormal return to sellers and buyers?

Accepted Answer

Abnormal returns to sellers are much smaller when the seller receives cash rather than buyer equity. Asset for buyer equity sales generate excess returns of about 10 percent for buyers and 3 percent for sellers. The higher returns for buyers may reflect information communicated to the seller not generally known by the investing public about the synergy between the divested asset and the buyer's operations and the overall future earnings potential of the buyer's business. In contrast, excess returns to sellers receiving cash average about 3 percent for sellers and about zero for buyers.

Question 2

Describe how you as an analyst would estimate the potential impact of the Huntington Ingalls Industries spin-off on the long-term value of Northrop Grumman's share price?

Accepted Answer

An important stated motivation for the spin-off by Northrop Grumman's management is to simplify the corporation, enable management to focus on those businesses it better understands, concentrate limited investment resources in businesses believed to grow more rapidly than shipbuilding, and to make the firm more easily understood by the investing public. Consequently, it would be necessary to estimate the present value of cash flows with and without Huntington Ingalls. While Northrop Grumman's cash flows would initially suffer from the loss of Huntington Ingall's cash flows, the rate of increase in future cash flows may accelerate. Furthermore, if investors find Northrop Grumman more transparent and less prone to enter the capital markets to finance its former capital intensive shipbuilding operations and hence less risk, the firm's weighted average cost of capital may decline.

Question 3

What is the likely impact of the spin-off on Northrop Grumman's share price immediately following the spin-off of Huntington Ingalls assuming no other factors offset it?

Accepted Answer

Assuming nothing else changes, the immediate impact on NGC's share price would be to lower it by the amount of the present value of the cash flows of its spun-off shipbuilding business. In practice, the impact is hard to ascertain because of the myriad factors to may impact share price on any given day.

Question 4

Why do businesses that have been spun off from their parent often immediately put antitakeover defenses in place?

Accepted Answer

The answer of Why do businesses that have been spun...

Question 5

In deciding to sell a business, a parent firm should compare the business' after-tax value in sale with its pre-tax value to the parent as part of the parent.

Accepted Answer

In deciding to sell a business, a parent firm should compare the business' after-tax value in sale with its after-tax value to the parent as part of the parent, to accurately assess the financial impact of the sale after considering tax implications.

Question 6

Divestitures, spin-offs, equity carve-outs, split-ups, and bust-ups are commonly used strategies to exit businesses.

Accepted Answer

Divestitures, spin-offs, equity carve-outs, split-ups, and bust-ups are indeed commonly used strategies to exit businesses.

Question 7

After months of trying to sell its 81 percent stake in Blockbuster Inc., Viacom undertook a spin-off in mid 2004. Why would Viacom choose to spin-off rather than divest its Blockbuster unit? Explain your answer.

Accepted Answer

The answer of After months of trying to sell its...

Question 8

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

Accepted Answer

Antitrust regulatory agencies have the power to make their approval of a merger contingent on the willingness of the merger partners to divest certain businesses in order to prevent the creation of a monopoly or to promote competition in the relevant market.

Question 9

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 10

On April 25, 2001, in an effort to increase shareholder value, USX announced its intention to split U.S. Steel and Marathon Oil into two separately traded companies. The breakup gives holders of Marathon Oil stock an opportunity to participate in the ongoing consolidation within the global oil and gas industry. Holders of USX-U.S. Steel Group common stock (target stock) would become holders of newly formed Pittsburgh-based United States Steel Corporation. What other alternatives could USX have pursued to increase shareholder value? Why do you believe they pursued the breakup strategy rather than some of the alternatives?

Accepted Answer

The answer of  On April 25, 2001, in an...

Question 11

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 12

What factors influence a parent firm's decision to undertake a spin-off rather than a divestiture or equity carve-out?

Accepted Answer

The answer of What factors influence a parent firm's decision...

Question 13

Since 2001, GE, the world's largest conglomerate, had been underperforming the S&P 500 stock index. In late 2008,
the firm announced that it was considering spinning off its consumer and industrial unit. What do you believe are
GE's motives for their proposed restructuring? Why do you believe they chose a spin-off rather than an alternative
restructuring strategy?

Accepted Answer

The answer of  Since 2001, GE, the world's largest...

Question 14

What are the advantages and disadvantages of tracking or target stocks to investors and to the firm?

Accepted Answer

The answer of What are the advantages and disadvantages of...

Question 15

Empirical studies show that the desire by parent firms to increase strategic focus is an important motive for exiting businesses.

Accepted Answer

Empirical studies have shown that the desire to increase strategic focus is indeed a significant motive for parent firms to exit businesses. Other motives include financial performance, industry factors, and divesting non-core assets.

Question 16

Explain how executing successfully a large-scale divestiture can be highly complex. This is especially true when the
divested unit is integrated with the parent's functional departments and with other units operated by the parent.
Consider the challenges of interdependencies, regulatory requirements, and customer and employee perceptions.

Accepted Answer

The answer of Explain how executing successfully a large-scale divestiture...

Question 17

How would you decide when to sell a business?

Accepted Answer

The answer of How would you decide when to sell...

Question 18

The timing of a divestiture is important. If the business to be sold is highly cyclical, the sale should be timed to coincide with the firm's peak year earnings.

Accepted Answer

Timing a divestiture to coincide with peak year earnings of a highly cyclical business can result in a higher sale price and better return for shareholders.

Question 19

Why would the U.S. Internal Revenue Service be concerned about a change of control of the spun-off business such that it might revoke its ruling that the spin-off satisfied the requirements to be tax-free?

Accepted Answer

The answer of Why would the U.S. Internal Revenue Service...

Question 20

How might spin-offs result in a wealth transfer from bondholders to shareholders?

Accepted Answer

The answer of How might spin-offs result in a wealth...

Quiz 16: Alternative Exit and Restructuring Strategies