Divestiture and Spinoff Process

ow that we all know about divestitures and what they are, let’s go over the divestiture and spinoff process step-by-step. Generally, each specific type of divestiture is unique. This means it can happen on a different schedule. However, for this one, we will look at the generalized six-step process.

Divestiture and Spin Off Process

Step 1: Settle on A Divestiture or Spinoff Decision

In this progression, the parent organization’s administration must settle on a choice. They must decide whether a divestiture is the appropriate course of action.

After a thorough financial analysis of different alternatives is complete, then, and only then can they make a decision. Conducting the financial analysis for a divestiture or a spinoff requires a special method. We will discuss this later.

Step 2: Formulate a Restructuring Plan

In a divestiture or spinoff process, the reorganization plan must be formulated. Moreover, there should be an arranged understanding between the parent and the auxiliary organization.

In the event of a spinoff featuring a continuous relationship between both parent and subsidiary, the plan is a must. The said plan should cover necessary details such as the disposition of the subsidiary’s assets and liabilities.

Additionally, the plan should also cover necessary details like the formation of a divestiture team. This said team should include members of management from a cross-section of corporate functions.

This includes human resources, accounting, finance, legal, and more. There are various jobs for this work. This includes different activities such as negotiating with buyers. It can also include handling various HR issues that could arise.

These issues may happen when employees are transferred to another company. Or when some employees are terminated.

Managerial resources should be invested in the planning and implementing the process. Especially when a larger unit is being divested.

For instance, the plan may give a detailed summary of the asset disposition when the subsidiary is keeping certain of its assets. This is while they transfer back the assets to the parent company.

There are also other issues like the retention of employees and the funding of their pension, healthcare liabilities should be addressed.

Step 3: Selling the Business

On the third step of a divestiture and spinoff process, the business must be sold. Companies need to find a buyer.

Oftentimes, they do this by using an investment banker. The investment banker will facilitate the selling process.

In most cases, the seller and their chosen banker will identify possible buyers. Then, they will advertise the company to them.

Usually, the seller and the banker will prepare a confidential memorandum that features a significant amount of relevant information. This information should be appealing to the buyer.

Once the buyer shows interest, a negotiating process will happen. There are likewise cases where there are multiple offers to the seller. In cases like these, the most appealing and advantageous ones will be selected.

Step 4: Getting the Shareholder Approval of the Plan

The importance of the exchange and the applicable state laws will direct to which degree of endorsement is essential. For example, investors must endorse a side project of a significant division of a parent organization.

At the point when this occurs, the arrangement is submitted to the investors at their gathering. The meeting may be normally scheduled, or they may host a special meeting just for this cause.

Moreover, the stockholders must also receive a proxy statement requesting the approval of the spinoff. The materials that the stockholders will receive must address other issues related to the meeting.

Step 5: Registration of the Shares

On the fifth step of the divestiture and spinoff process, the shares must be registered. The SEC or the Securities and Exchange Commission requires a registration of the stocks if the transaction requires the issuance of shares.

They must produce a prospectus. A prospectus is a piece of the enrollment articulation. It is a piece of the ordinary enlistment measure.

The organization must convey the outline to all investors who get stock in the spun-off element.

Step 6: Closing the Deal

In the sixth and final step of a generalized divestiture and spinoff process, it is time to close the deal. At this point, they have completed all the preliminary steps. And they can finally consummate the deal.

Both companies have exchanged and reviewed considerations. The division and the parent organization are separate. This is, obviously, as per a prearranged plan.

Market Liquidity

Earlier, we promised to give you a guide on the methods of the decision to divest a unit. There are various components that can lead an organization to the choice to sell a unit.

Amongst these reasons, the most well-known is poor performance. While this may seem to be the most obvious factor, a study by Schlingemann, Stulz, and Walking says otherwise.

According to their study, market liquidity is a bigger factor. They analyzed over 168 divesting companies between the years 1979–1994. In their study, they concluded that companies in more liquid industries were more likely to be divested.

This is primarily because in a liquid market, the sellers have a better chance to receive the full or higher value for their assets. This is compared to markets that are less liquid.

Schlingemann, Stulz, and Walking also measured liquidity by the volume of assets sold in a given period of time. If there are any unrelated segments as part of a focus enhancement program first in liquid markets can sell better. This is compared to those that face less liquid markets.

Hopefully, this discussion about the Divestiture and SpinOff Process has been helpful and beneficial to you. In the following arrangement of articles, we will go over Round-Trip Wealth Effects and more.

Round-trip Wealth Effects are a big part of mergers and acquisitions. We will go over different studies regarding the subject, and how each one affects the market. Roundtripping is a term often used in financing, businesses, and accounting. See you soon!

© Image credits to Steve Johnson