A Case Study for Spinoffs

Mergers and
acquisitions (M&A) transactions tend to be analyzed mostly from the
acquirer’s perspective, whether they involve mergers or takeovers. At the same
time, they have enormous implications for the target or the seller. Businesses
may have to be downsized, contracted or split due to which companies may have
to engage in sale transactions or restructuring of their business undertakings.
There are a number of such restructuring options in the form of divestitures,
which involve sales of subsidiaries or business divisions by a company. Other
sophisticated forms of restructuring predominantly used in the U.S. include
equity carve-outs, spin-offs, split-offs, and split-ups, which provide a number
of transactional options for corporate restructuring. In India too, such
transactions are fairly common in the form of slump sales, spin-offs as well as
demergers.
Despite the varied
nature of these M&A transaction structures, the focus of business and legal
literature has largely been on mergers and takeovers, and far less on
divestitures. In this context, a brief
analysis in [email protected]
of the proposed spin-off of Hewlett-Packard
into two companies is interesting. This transaction seeks to represent a case
study in the manner in which corporate spin-offs can be structured and
implemented.
On the one hand,
there are similarities among the various transactions in that they are undertaken
with the expectation of unlocking shareholder vaue. On the other hand, as the
study indicates, there are striking dissimilarities between mergers or
takeovers as well as spin-offs. While the essence of a merger or takeover
involves synergies in the operations due to which the profitability of the
combined businesses is greater than the sum of their parts (popularly referred
to as the “2+2=5” phenomenon), in a spinoff the value is unlocked by separating
the businesses because “the whole is worth less than the sum of the parts”. On
another count, while the focus in a merger or takeover is on the
post-transaction integration, in a spinoff it is on disintegration which must
lead to two companies that can be independently freestanding.
These intricacies
in the business rationale for different types of M&A transactions is worth
noting. Given profile of the company and the size of the transaction (with each
of the two resultant companies expected to earn annual revenues of over US$ 50
billion), the HP spinoff is likely to be closely watched as a suitable case
study for the busines and legal outcomes of the transaction.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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