Types of Restructuring

Strategic decisions made by corporations are not limited to expansion; sometimes the decision to downsize can benefit the company’s valuation. In this article, we will discuss the various forms of restructuring.

Divesture

This action is the sale of a business unit to an outside company (note that divestures are sometimes forced upon companies under antitrust law).  Below are some reasons for divestures:

  • Sometimes a firm may divest a business unit to raise cash.
  • Sometimes a subsidiary no longer falls within the firm’s strategic plans.
  • Sometimes a reverse synergy is created when business units are worth more separately than combined under the firm.
  • Sometimes a firm simply cannot earn an appropriate rate of return on a business unit and will sell to a buyer with better capabilities in that specific area.

Spin-offs

In this restructuring instance, a company will establish a new legal entity from one of its business units.  Spin-offs can also be forced by law.

  • Shareholders at the time of the spin-off will get a proportional amount of shares in the spun-off entity.
  • While a divesture infuses cash into the company, a spin-off does not.
  • A spin-off may be undertaken to allow company management to focus on “core” operations.

Equity Carve Out

The company sells a business unit in the form of public offering.

This content is for paid members only.

Join our membership for lifelong unlimited access to all our data science learning content and resources.