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Subject 10. Corporate Restructuring PDF Download
Major reasons for divestiture:

  • Change in strategic focus. If the division is outside the parent's core strategic focus, the parent may sell the division to another company.
  • Poor fit of division. The parent company may want to move out of a particular line of business that it feels is no longer fits into its plans in which it is unable to operate profitably.
  • Reverse synergy. This means the parts are worth more separately than they are within the parent company's corporate structure. For example, a large parent company is not able to operate a division profitably, whereas a smaller firm, or even the division by itself, might operate more efficiently and therefore earn a higher rate of return.
  • Cash flow factors. A sell-off produces the immediate benefits of an infusion of cash from the sale. Companies that are under financial duress are often forced to sell off valuable assets to enhance cash flows.

Forms of restructuring:

  • A spin-off occurs when a company separates a portion of its business into a newly created subsidiary and distributes shares of that subsidiary to its shareholders pro rata. A spin-off can be an easy way to dispose a "problem" subsidiary without recognizing any gain or loss.
  • A carve-out is similar to a spin-off, but the shares are sold to the public. Most likely the parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering. Sometimes companies carve out a small proportion of the shares to establish the market in the subsidiary and subsequently spin off the remainder of the shares.
  • In a split-off, which is similar to a spin-off, some of the parent company’s shareholders receive new shares of a newly created entity in exchange for their shares of the parent company.
  • Liquidation means breaking up a company and selling its assets piecemeal. It is typically associated with bankruptcy.

Learning Outcome Statements

k. compare and contrast equity carve-outs, spin-offs, split-offs, and liquidation;

o. explain common reasons for restructuring.

CFA® 2023 Level I Curriculum, Volume 3, Module 18

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