firms in divesture
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7/29/2019 Firms in Divesture.
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Name of Institution
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Beyond cash dividends: Buybacks, spinoff and divestures.
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7/29/2019 Firms in Divesture.
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Name of InstitutionAlternative ways of returning
cash to stockholders Equity repurchase---paying dividends andbuying back stocks have same effect on a
firm. The cash assets of the firm decline
by the amount of the stock buyback or
dividends.
The process of buyback----if more than
10% are bought back, it has go by tenderoffer. It has to specify number of shares,
period of time and price.
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7/29/2019 Firms in Divesture.
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Sometimes, it keeps the option to
withdraw the offer if insufficient offers
come. they also use the services of
investment bankers.
If the number is smaller than 10%, it can
go through open market repurchase.
Difference between tender offer and open
market repurchase------1open market,
firm purchases at market rate and in
tender offer 3
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7/29/2019 Firms in Divesture.
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Premium is offered..2in open market
purchase firm do not have to disclose
publicly their intent to buy back , however
regulator rules have to be complied. 3In
open market purchase can be spread over
much longer period.
Other alternative is available to the firmthat it can negotiate with the big
stockholder for purchase,
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7/29/2019 Firms in Divesture.
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Name of InstitutionAdvantages of buyback over
cash dividend to firms Dividend record has to be maintained butbuy back is one time return of cash.
uncertainty about future cash flows make
buy back a better option.
The buy back can be reversed.
Buy back offers greater control to the
promoters to increase their holding.
Buy back helps holding share price.
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Name of InstitutionAdvantage to share holders in
buy back Tax benefit if dividend is taxed. Shareholders who want to sell only can
exercise the option.
In short, equity repurchase allows firms to
return cash to stock holders and still
maintain flexibility for future periods.
Reduces shares, increases EPS and with
same PE, price may go up.
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However, the price of the share going up
or going down is dependant upon the
resultant DER after buy back.
The buy back can give a message to the
outsiders that future is uncertain and cash
flows doubt full.
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7/29/2019 Firms in Divesture.
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Name of InstitutionDividend vs. equity repurchase
Sustainability and stability of excess cash
flows---if cash flows are temporary or
unstable-buyback is better.
Stockholders tax preference.
Predictability of future investment needs.
Undervaluation of the stock. Management compensationESOP.
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7/29/2019 Firms in Divesture.
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Name of InstitutionForward contracts to buy equity
Commitment so good signaling. Increases
risk .
The decision of forward contracts will
depend upon Trade off between signaling
effect and risk/flexiblity.
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7/29/2019 Firms in Divesture.
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Name of InstitutionStock split
No cash is paid out and the split does not
alter the proportional ownership of the
concern.
As dividend , there is ex- date , book
closure date.
Reason of spilt is that some firms want to
keep their price in a range. Widely held
range will be beneficial.
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7/29/2019 Firms in Divesture.
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Transaction cost will also be considered.
One school of thought will say that spilt
shows that firm expects increase in
earnings. Some studies have shown that
split has unintended effect on stockholders
because of transaction cost.
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7/29/2019 Firms in Divesture.
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Name of InstitutionReason of stock dividends,
Some view that it is fooling exercise and
firm is in trouble and paying regular cash
dividend is not possible.
Others view, stock dividends as a
supplement to cash dividends and use
them in times of high earnings.
Stock splits and stock dividends change
the number of shares outstanding/
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Name of InstitutionDivesture
A firm sells assets or division to the
highest bidder. On a sale , firm gets cash
which is either rein invested or returned to
the shareholders.
It can be initiated by both parties and if it
has substantial value will engage
investment banker.
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7/29/2019 Firms in Divesture.
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Name of InstitutionHoe divesture effects firm value
If the divesture value is equal to the
present value of expected cash flows it will
have no effect.
If the divesture value is greater than
present value of cash flows, it will be
beneficial or vice versa.
The reason of divesture can be buyer
may be more efficient in its utilization---
need of cash or rolling back diversification.
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7/29/2019 Firms in Divesture.
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Name of InstitutionMarket reaction to divesture
View with skepticism , the firms that are
evasive about the reason of divesture.
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7/29/2019 Firms in Divesture.
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Name of InstitutionSpinoffs/splitoffs/spiltups
In a spinoff , a firm carves out a division
and creates new shares with claims on
this portion of the business. Existing
shareholders in the firm receive theseshares in proportion to their original
holding. They can hold these shares or
sell in market.
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Name of InstitutionSpit up
Spilt up is expended version of spinoff ,
the firm splits into business lines ,
distributes shares in these business lines
to the original stockholders in proportion totheir ownership in the original firm and
then ceases to exist.
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Name of Institutionspilt off
Similar to spinoff, but the existing
shareholders are given the option to
exchange their parent company stock for
these new shares , which changes theproportional ownership in the new
company.
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Name of InstitutionDifferences between divesture
and spinoff No cash is generated for the firm inspinoff.
New management takes over spinned off
unit.
Spinoff can be a effective way of creating
value when subsidiaries or divisions are
not proving to be effective,
Spinoff saves taxes.
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Name of InstitutionEquity carve out
In a equity carve out, a firm separates out
assets or a division , creates shares with
claim on these assets. And sells them to
public.
In general, the parent company retains
control but in some equity carve outs are
follwed by spinoffs.
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Name of InstitutionReasons of equity carve outs
It allows conglomerates to
deconglomorates.
Difference between carve outs and
spinoffs----carve outs bring in cash and
retains control.
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7/29/2019 Firms in Divesture.
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Name of InstitutionTracking stocks
Companies create shares in division or
subsidiaries that track the performance of
just these units.
mostly tracking stocks have no voting
rights. Liquidation rights as equity holders.
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