Antitakeover provisions in corporate spin-offs

SSRN Electronic Journal, 2002

We develop a new rationale for the performance and value improvements of firms following corporate spin-offs. We consider a situation of a firm with multiple divisions, where incumbent management may have differing abilities for managing various divisions. Giving up control to a rival with better ability in managing the firm, while it benefits equity holders (including incumbent management) by increasing the firm's equity market value, also involves losing the incumbent's benefits from control. Due to this trade-off, the incumbent, while willing to relinquish control to extremely high ability rivals, may not wish to do so for rivals who have only moderately higher management ability relative to him. Spin-offs increase the chance of loss of control to potential rivals in two ways: First, it reduces the ability of the incumbent to use firm size strategically against the rival in a control contest (after the spin-off, the rival can invest to the full extent of his wealth in the equity of the firm more vulnerable to a takeover). Second, it increases the probability that passive investors will vote with the rival in a contest for control for at least one division (in a joint firm, the superior management ability of any rival with respect to one division may be neutralized by inferior ability with respect to another one). This increased chance of loss of control following a spin-off, in turn, motivates the incumbent to work harder (despite his disutility for effort) in equilibrium in an attempt to maintain control. Thus, the increase in equity market value of the firm upon spin-off announcements arises not only from market participants incorporating in their valuations the increased probability of a takeover by a more able rival for control, but also from their anticipating the increase in managerial efficiency arising from the disciplining effect of the spin-off on firm management. Our analysis predicts that, in addition to positive announcement effects, the equity of a sample of spunoff firms will also exhibit long-term positive abnormal returns under certain conditions. Our model also explains a wide variety of other recently documented empirical regularities, and provides hypotheses for further empirical work.

Journal of Financial Economics, 2004

We develop a new rationale for corporate spin-offs, and for the performance and value improvements following them, based on corporate control considerations. We consider a firm with multiple divisions, with incumbent management having different abilities for managing these divisions. If the incumbent loses control to a more able rival, it benefits all shareholders (including the incumbent) by increasing equity value, but involves the incumbent losing his private benefits of control. We show that a spin-off increases the incumbent's chance of losing control to such a rival. This, in turn, motivates the incumbent either to work harder at managing the firm (in order to avoid any loss of control), or to relinquish control of one of the firms resulting from the spin-off (either immediately following the spin-off, or subsequently in a control contest). We show that spin-offs will be associated with positive announcement effects and increases in long-term operating performance. Further, certain categories of spinoffs will exhibit long-term positive abnormal stock returns.

Insurance Mathematics & Economics, 1995

The formation of spin-off companies by corporations facing unlimited liability exposures (e.g., oil spill liability by oil transport and oil production firms) is shown mathematically to actually increase shareholder wealth and firm value. This increase occurs at the expense of the liability claimants who essentially must absorb the cost of a put option on the value of the limited liability feature obtained by spinning off the company (a stop-loss type insurance premium). In addition to discussing this issue, the paper provides illustrations from current pollution liability history and considers differences between the stockholder/bondholder incentive conflicts and the stockholder/liability claimant conflicts.

Journal of Financial Economics, 1993

We investigate the value created through spinoffs over the 1965-1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.

Journal of Financial Economics, 1983

We examine security price reactions around the announcements of 123 voluntary spin-offs by 116 firms between 1963 and 1981 involving a pro-rata distribution of the common stock of a subsidiary to the stockholders of the parent firm. The median spin-off in the sample is 6.6% of the original equity value and is associated with an abnormal return of 7.0~o from 50 days prior to the announcement through completion of the spin-off. No evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders. Over the entire event period we find positive gains for firms engaging in spin-offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and/or regulatory difficulties. In the two-day interval surrounding the first press announcement we find positive average excess returns for all groups.

International Journal of Entrepreneurial Venturing, 2009

This article sets focus on the performance of corporate spin-offs. The existing literature agrees that corporate spin-offs perform better than independent start-ups. However, systematic evidence on the subject still seems elusive. We therefore set out to review articles that specifically address the performance of corporate spin-offs compared to independent spin-offs. Furthermore, we compare the performance between different types of spin-offs, because spin-offs are not a homogeneous group. We distinguish between spin-offs that receive resource support from their incumbent firms and spin-offs that do not receive support. A Danish sample of 325 companies (spin-offs and independent firms) is used to show that spin-offs in general perform better than independent spin-offs and further, that in between the group of spin-offs (spin-offs with direct or indirect relations with incumbent firms) there also exists performance differences. Spin-offs with indirect relations to an incumbent firm perform better than spinoffs with direct.

UC Irvine law review, 2019

The recent rise of shareholder engagement has revamped companies’ corporate governance structures so as to empower shareholder rights and to constrain managerial opportunism. Notwithstanding the general trend, this Article uncovers corporate spin-off transactions — which divide a single company into two or more companies — as a unique mechanism that insulates the management from shareholder intervention. In a spin-off, the company’s managers can fundamentally change the governance arrangements of the new spun-off company without being subject to monitoring mechanisms, such as shareholder approval or market check. Those changes often empower managers over shareholders. Furthermore, most spin-off transactions enjoy tax benefits. The potential agency problems associated with the managers’ unilateral governance changes can be further compounded when the managers adopt multiple classes of common stock with unequal voting rights (“dual-class stock”) in the new spun-off company without sha...

SSRN Electronic Journal, 2000

This paper analyses two-step spinoff based on consequences of the expected future change in value of a stakeholder's claim and its ability to block a restructuring. We show that a two-step spinoff allows an otherwise blocked value increasing (one-step) spinoff to take place by using the market information that a minority equity carve-out generates. We develop a corporate governance tool that advocates maximizing shareholder wealth considering the claim of another stakeholder under twodimensional asymmetric information consisting of 1) unobservable asset impairment and 2) management conglomeration agency problem. 2 capital market as the crucial decision factor in divesting either through a spinoff or a carve-out. A pioneering empirical study by shows that a minority equity carveout is usually the first step of a two-step spinoff, or the carve-out is undone by the firm through a buyback of the carved equity. In other words, one may view minority equity carve-outs as either a "success" leading to a two-step spinoff or a "failure" which is followed by an equity buyback. They also show that successful two-step spinoffs (the second restructuring events) generate abnormal positive returns for both the parent and the subsidiary, while failed two-step spinoffs usually follow a below average subsidiary performance that is offset after the eventual buyback of the shares by the parent.

The Journal of Finance, 2002

This paper examines the investment behavior of firms before and after they are spun off from their parent companies. We show that investment after the spinoff is significantly more sensitive to measures of investment opportunities (e.g. industry Tobin's Q or industry investment) than it is before the spinoff. Spinoffs tend to cut their investment in low Q industries and increase their investment in high Q industries. These changes are observed only in spinoffs of firms in industries unrelated to the parents' industries and in spinoffs where the stock market reacts favorably to the spinoff announcement. Our findings point to the possibility that one effect of spinoffs is to improve the allocation of capital.

International Journal of Banking and Finance

The study reported here examines insider trading and the issue of undervaluation as a motive behind corporate spinoffs. The results show an unmistakable increase (decrease) in the number of insider purchases (sales) and net purchases (sales) in the four quarters prior to a spinoff announcement. In addition, relative to a benchmark period, insider selling is significantly lower, and their net purchases significantly higher, in the three quarters prior to a spinoff announcement, as compared to other periods. Furthermore, announcement period excess returns for abnormal net insider purchases are significantly higher than excess returns for abnormal net insider sales. However, only firms with abnormal net insider purchases exhibit significant improvement in their long-run market and operating performance after a spinoff. The results seem to suggest that undervaluation is an important motive behind corporate spinoffs and that it is possible to identify the quality of a spinoff firm based ...