Private Equity.edited

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1 Private Equity & Corporate Restructuring Assignment Student Name University Course Professor Name Date

2 Private Equity & Corporate Restructuring Assignment Spin-off, An Equity Carve-Out, and Divestiture A spin-off is a business strategy used when an organization splits off a portion of its operations to form a new, independent company. Equivalent shares in this new company are awarded to parent company shareholders. This frequently increases shareholder value for both organizations by enabling them to concentrate on their distinct strategic directions ( Brigham & Daves, 2019) . Under the equity carve-out strategy, a business sells the public an initial public offering (IPO) of a minority stake—typically less than 50%—in a subsidiary ( Weston et al., 2004) . As a result, the parent company receives capital, and the subsidiary gains more visibility and independence. A corporate subsidiary or division is sold outright or is liquidated as part of a divestiture. The reasons may include raising money, complying with regulations, or strategically realigning. This can be accomplished by liquidation, a buyout by management, or even a sale to another company. The Cause of The Increase in Divestitures During The 1970s The corporate world underwent significant change in the 1970s. Stricter regulatory frameworks forced businesses to divest parts that might be subject to antitrust lawsuits (Prechel, 2000). Companies were forced to reevaluate their portfolios and sell off non-core businesses due to the oil crisis and the ensuing economic difficulties. In addition, businesses commonly divested certain operations to streamline newly combined entities due to the spike in M&A activity. Reasons for Voluntary Divestitures.

3 Voluntary divestitures are employed for various reasons, including financial restructuring and strategic refocusing. Companies that diversify into areas outside of their core competencies as they grow use strategic refocus ( Lee, 2021) . They might eventually sell off these non-core divisions to concentrate again on their core competencies. Financial restructuring is selling off a profitable or unprofitable division to raise the money required to pay off debt, invest in the company's core business, or give shareholders their money back. The ExxonMobil Corporate Divestiture Leading energy company ExxonMobil sold NEO Energy its non-operated upstream assets in the UK in 2021 (Bond, 2023). This was a calculated strategic move meant to increase focus on the core assets most essential to Exxon's long-term growth plan, in keeping with the company's emphasis on increasing capital efficiency. The Six-Step Divestiture and Spin-Off Process i. Strategic Decision: The board and top management first examine business portfolios to identify which segments fit with long-term goals. ii. Preparation: After deciding, work is implemented by dividing up resources, assets, and labor. It is crucial to ensure financial and legal documentation clarity for prospective investors. iii. Marketing: The management then develops a captivating story about its value proposition and growth potential to market the division to prospective customers. iv. Negotiation: This stage, which is the core of the divestiture, involves thorough discussions about the sale's terms, valuation, and post-sale transition strategies.

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4 v. Sealing the Deal: After both sides agree, formal legal documentation is created, and the deal is finalized. vi. Transition and Separation: After the sale, the focus is on ensuring everything goes smoothly, including customer communications, branding, and operations. Owing to the complexities involved, a significant amount of time must be spent during the negotiation phase to balance the buyer and seller's expectations. Effects of divestiture announcement on wealth Even though businesses frequently announce divestitures with optimism, the market's reaction can vary widely. A positive increase in stock prices could be interpreted as approval, as investors expect improved concentration and financial stability ( Baker & Wurgler, 2007) . On the other hand, a drop could indicate worries about the company's strategic course or its capacity to monetize the asset it has sold fairly. The Tax Consequences of a Spin-Off. The IRS stipulates requirements regarding the nature of the distribution and the business's ongoing operations for a spin-off to be eligible for tax exemptions ( Kim & Min, 2019) . While these provisions stop solely tax-driven spin-offs, businesses must plan carefully to ensure compliance and avoid unforeseen tax liabilities. Liquidation and Reorganization. During liquidation, all operations are terminated, assets are sold, and the proceeds are used to pay off debts ( Baker & Wurgler, 2007) . A business aims to distribute any remaining funds to its shareholders.

5 The Advantages and Disadvantages Of Chapter 11 Bankruptcy Advantages Companies can continue operating even during financial instability because of the Chapter 11 bankruptcy provision, allowing them to restructure debt and possibly reduce obligations (Jacoby & Janger, 2013) . Disadvantages Filing for bankruptcy can reduce stakeholder confidence and brand value, harming a company's reputation. Managing a Chapter 11 bankruptcy is also a time and money-consuming process. Scripture Description According to the NIV, "Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you." (Barker et al., 2020). This emphasizes the value of financial responsibility, which businesses should consider before taking on excessive debt. Reorganizations and divisions can be viewed as instruments for realigning with these biblical precepts.

6 References Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of economic perspectives , 21 (2), 129-151. Barker, K. L., Strauss, M. L., Brown, J. K., Blomberg, C. L., & Williams, M. (Eds.). (2020). NIV study bible . Zondervan. Bond, P. (2023). French fossil imperialism, South African subimperialism, and anti-imperial resistance–CADTM. Brigham, E. F., & Daves, P. R. (2019). Intermediate financial management . Cengage Learning. Jacoby, M. B., & Janger, E. J. (2013). Ice cube bonds: allocating the price of process in Chapter 11 bankruptcy. Yale LJ , 123 , 862. Kim, Y. R., & Min, G. (2019). Insulation by Separation: When Dual-Class Stock Met Corporate Spin-offs. UC Irvine L. Rev. , 10 , 1. Lee, V. Y. (2021). Corporate asset restructuring through mergers, acquisitions, and divestitures (Doctoral dissertation, University of Reading). Prechel, H. (2000). Big business and the state: historical transitions and corporate transformations, 1880s-1990s. SUNY Press. Weston, J. F., Mitchell, M. L., Mulherin, J. H., Siu, J. A., & Johnson, B. A. (2004). Takeovers, restructuring, and corporate governance. (No Title) .

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