The Choice of Asset Selloff: a Comparison of Spinoff and Equity Carveout

In: Business and Management

Submitted By bding
Words 3508
Pages 15
The last two decades have witnessed a surge in asset selloffs as positive adjustments to the inefficient diversification and overcapacity undertaken by large firms. Among various practices of asset selloffs, spinoff and equity carve out are two major forms of particular research advantage in that both parent firms (i.e. retained or continuing entities) and subsidiaries are publicly listed on stock exchanges and thus their firm-specific information (stock prices, bond prices, financial statements, corporate events, etc.) is observable to researchers. Through asset selloffs, the parent company takes out part or whole of assets in the wholly owned divisions or subsidiaries and sells to third party for cash or distribute the ownership shares to existing shareholders as stock dividend so that the new entity’s operation is separate from the parent’s. In a spinoff, a new corporate is created and its shares are transferred to existing shareholders on a pro rata basis and publicly traded on stock exchanges which may or may not be different from where the parent is listed. In contrast to non-cash-involvement characteristic of a spinoff, an equity carveout is an initial public offering (IPO) of a portion of the parent company to outside investors in exchange for cash. Usually parent firms hold a minority interest in the carved-out subsidiaries. Other than corporate restructuring characteristic as shown in a spinoff, an equity carveout transaction also involves management’s financing decision since cash plays a role in. In general, spinoff and equity carveout are regarded as the reversed transactions of stock offer and cash offer in merger deals, respectively. A rich body of previous research activity has been made on spinoff and equity carveout and brought about fruitful results. However, little has been done as to comparing these two corporate restructuring mechanisms…...

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