In one of my articles, I refered to privatization as one of the financial strategies available to corporations. I have also touched base on the inorganic growth vide Mergers & Acquisition.

But do you, as financial executives, know that deploying a breakup strategy can also enhance shareholder value? Like privatization from a public listed company to a private limited company, break up strategy is also an attempt to make known to the market that your company’s worth is more than what has been assigned by the analyst. This is called “value transparency”.

The belief is that by valuing as a stand alone entity instead of as a “bundle” within a group of companies, the value should then become more obvious and might reflect a more favorable value.

Basically, breakup strategies can be in various forms as illustrated below:

1. A divestiture is the sale of a piece of a company for example a division to another party. By doing so, this become a stand alone unit which will be easier to analyse and hopefully will fetch a higher added value to the seller,
2. In a spin-off, a parent company divests a business unit or subsidiary. This divestment is not sold for cash or securities. Instead, shares in the new company are distributed to the shareholders of the parent company on a pro-rata basis. Some examples of spin-off include Quaker Oats’ spin-off of its toy manufacturing subsidiary, Fisher-Price; General Motors’ spin-off of EDS and others,
3. An equity carve-out is a type of divestiture in which a parent company sells equity in one of its subsidiaries to the public through an initial public offering.(IPO)

Besides enhancing shareholder value, the intention of the parent company after divestiture, spin off or equity carve-out might be to leave itself as a “pure play” in its own core competency field/business.

A good illustration is the AT&T’s case:

In September 1995, AT & T announced that it would divide its operations into three publicly traded companies. In addition to AT&T, the communication services company, there would be a network systems company called Lucent Technologies and a computer company called NCR. To form Lucent, first there was an equity carve-out in which 17% of the new company was offered to the public through an IPO. The balance of 83% was distributed as tax-free to the AT&T shareholders.

With this carve-out of Lucent and spin off of NCR, AT&T now laid focus as a pure communication services company.

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