Corporate Restructuring: Equity Carve-Outs, Spin-Offs, Split-Offs, and Liquidation

Corporate restructuring is the act of modifying a company’s capital structure or operations by selling, splitting off, or shedding operating assets. Divestiture occurs when a company decides to liquidate or spin-off a division or a subsidiary. Restructuring can take the following forms:

• Equity carve-out: It involves creating a new entity and the sale of equity in it to outsiders.
• Spin-off: A new separate entity is formed, and the parent company’s shareholders receive a proportional number of shares. The result of a spin-off is that shareholders owning stock in two different companies that used to be one.
• Split-off: This is similar to the spin-off, but the main difference is that some of the shareholders in the parent company are given shares in the new company in exchange for their shares in the parent company.
• Liquidation: This involves dividing, breaking up a company, and selling off its assets and is often associated with bankruptcy.

Question

Jake Newton is an analyst currently overseeing the corporate restructuring of a company. Newton has suggested that the management of the company break up the company and sell off its assets. The divestiture technique that Newton is suggesting is most likely a (an):

1. Liquidation.
2. Equity carve-out.
3. Split-off.

Solution

The correct answer is A.

Liquidation involves dividing, breaking up a company, and selling off its assets and is often associated with bankruptcy.

B is incorrect. In equity carve-out, a new legal entity is formed, and its equity is sold to outsiders.

C is incorrect. A split-off occurs when some of the parent company’s shareholders are given shares in a newly created entity in exchange for their parent company shares.

Reading 18: Mergers and Acquisitions

LOS 18 (k) Distinguish among equity carve-outs, spin-offs, split-offs, and liquidation.