Prof.

Ian Giddy
New York University
Corporate Break-Ups
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 2
Mergers, Acquisitions & Divestitures
Mergers & Acquisitions
Divestitures
Valuation

Concept: Is a division or firm worth more
within the company, or outside it?

Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 3
Breaking Up
WhyThe business may be worth more
outside the company than within
HowSell to another company, or to the
public, or give it to existing shareholders
Tax AspectsAs a rule if you get paid in cash
you realize a taxable gain; not otherwise
Effect on ShareholdersThe bigger the part
sold off, the greater the percentage gain
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 4
Case Study: Pinault-Printemps-Redoute
Why?
How?
Tax Aspects?
Effect on Shareholders?
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 5
Why Break Up?
Pro-active
Defensive
Involuntary
Examples of each?
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 6
Why Break Up?
Pro-active (GM tracking/selling DirectTV)
Defensive (ABB selling ABB Cap Lease)
Involuntary (ATT breakup, Enron)
Examples of each?
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 7
Why Break Up?
Post-acquisition disposals
Shift of core business or strategy
Underperforming business or mistake
Lack of fit, refocus on core business
Avoid competing with customers
Antitrust compliance
Need for funds
Market or litigation risk
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 8
Tax Consequences
The spin-off and related techniques have
the advantage that they can be
structured so as to be tax free (USA)
Tax Code Section 355 requirements:
Both the parent company and the spun-off
entity must be in business for at least 5
years
The subsidiary must be at least 80% owned
by the parent
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 9
Breaking Up
Spin-Off Split-Up Tracking Stock
Tax-Free
Divestiture Equity Carve-Out
Split-Off IPO
Bust-Up
Taxable
Breaking up
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 10
Tax-Free Breakups
Spin-offspro-rata distribution by a company of all
its shares in a subsidiary to all its own shareholders
Split-offssome parent-company shareholders
receive the subsidiary's shares in return for their
shares in the parent
Split-upsall of the parent company's subsidiaries
are spun off and the parent company ceases to exist
Tracking Stockspecial stock issued as dividend:
pays a dividend based on the performance of a
wholly-owned division


Spin-Off Split-Up Tracking Stock
Tax-Free
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 11
Tracking Stock
Tracking stock, sometimes known as letter
stock or alphabet stock, is a class of stock
designed to reflect the value and track the
performance of a part of the issuer's assets,
usually a separate business or group of
businesses. Claimed advantages:
preservation of the efficiencies of a single
corporation
ability of the market to more accurately value the
respective businesses of the issuer
What does it really add?

Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 12
Taxable Breakups
Divestituresthe sale of a division of the
company to a third party
Equity carve-outssome of a subsidiarys
shares are offered for sale to the general
public
Split-off IPOsa private company offers a part
of the company to the public
Bust-upsvoluntary liquidation of all of the
companys business
Divestiture Equity Carve-Out
Split-Off IPO
Bust-Up
Taxable
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 13
Divestitures Can Add Value
Shareholders of the selling firm seem to
gain, depending on the fraction sold:
% of firm sold Announcement effect
0-10%
10-50%
50%+
0
+2.5%
+8%
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 14
Divestitures Can Add Value
Value of combined company
Value of seller without sub + value of sub
(Seller may gain from more managerial focus,
lower WACC, less conglomerate discount)
Value of sub standalone value
Value of sub acquisition value to
another company
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 15
Break-up Computation
PPR with Finaref PPR without Finaref Finaref Standalone Finaref with CA
EBITDA 800 500 300 330
Tax rate 40% 40% 40% 40%
Beta 1.4 1 1.6 1.6
Growth rate 3.50% 2.50% 4% 4.50%
Equity 8,000 6,000 3,000 3,500
Debt 7,000 5,000 0 0
Risk Free 3% 3% 3% 3%
Mkt Risk Premium 7% 7% 7% 7%
Debt spread 3% 2% 4% 2%
Re 12.80% 10.00% 14.20% 14.20%
Rd 6.00% 5.00% 7.00% 5.00%
WACC 8.51% 6.82% 14.20% 14.20%
Enterprise PV 16,538 11,868 3,059 3,555
Equity PV 9,538 6,868 3,059 3,555
Additional Gains/losses 1,187 0 - 1,400
Choice 9,538 11,114 10,155
Source: breakup.xls
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 16
Framework for Assessing
Restructuring Opportunities
Restructuring
Framework
1
2
Current
Market
Value
3
Total
restructured
value
Potential
value with
internal
+ external
improvements
Potential
value with
internal
improvements
Companys
DCF value
Maximum
restructuring
opportunity
Financial
structure
improvements
4
Disposal/
Acquisition
opportunities
Operating
improvements
Current market
overpricing or
underpricng
5
(Eg Increase D/E)
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 17
Using The Restructuring Framework
($ Millions of Value)
Restructuring
Framework
1
2
Current
Market
Price
3
Optimal
restructured
value
Potential
value with
internal
and external
improvements
Potential
value with
internal
improvements
Company
value as is
Maximum
restructuring
opportunity
Financial
engineering
opportunities
4
Disposal/
Acquisition
opportunities
Strategic
and operating
opportunities
Current
perceptions
Gap: Premium
5
$ 25
$ 975
$ 300
$ 1,275
$ 350
$ 1,625
$ 10
$ 1,635
$ 635
$1,000
Eg Increase D/E
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 18
Marriott
The Choice
the decision of whether to split Marriott
Corp. into two companies--Marriott
International and Host Marriott
The Situation
decline in real estate values
has a significant percentage of assets
in hotels it had planned to sell
difficult for Marriott to pursue growth
strategies
market price of the company had
declined significantly
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 19
Marriott: Assignment
Will this type of reorganization
meaningfully improve the company?
What are the different way of effecting
break-ups? In the Marriott case, are there
reasonable alternative approaches?
Draw up a spreadsheet comparing the
before-and-after capital structure of
Marriott and its proposed component parts
How are bondholders affected? How can
they protect their interests?
Make a recommendation, and justify it.

Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 20
Marriott: Project Chariot
Marriott Corp.
Marriott Intl. Host Marriott Corp.
Intangibles
Franchises
Management
Services
Distribution
Services
Timeshares
Hotels
Airport and
Road Plazas
Land
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 21
Marriott: Breaking Up
Spin-Off Split-Up Tracking Stock
Tax-Free
Divestiture Equity Carve-Out
Split-Off IPO
Bust-Up
Taxable
Breaking up
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 22
Marriott: Financial Restructuring
Marriott Corp. Marriott Intl Host Marriott
Long-term debt 2732 378 2362
LYONs 228 205.2 22.8
Convertible preferred 200 200
Shareholders' equity 585 524 61
Total long-term capital 3745 1107.2 2645.8
Long-term debt/Total 73% 34% 89%
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 23
Corporate Restructuring
Divestiturea reverse acquisitionis
evidence that "bigger is not necessarily
better"
Going privatethe reverse of an IPO
(initial public offering)contradicts the
view that publicly held corporations are
the most efficient vehicles to organize
investment.
Copyright 2002 Ian H. Giddy
Corporate Financial Restructuring 27
Contact Info
Ian H. Giddy
NYU Stern School of Business
Tel 212-998-0426; Fax 212-995-4233
Ian.giddy@nyu.edu
http://giddy.org