Corporate Restructuring, An Overview Version 05

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Continuous organizational learning is necessary to stay up to date. Organizations that cannot or will not learn will become obsolete. Leaders must periodically examine the structure of their organization to assure that it continues to provide an environment for organizational learning. The points of leverage in organizations are the beliefs and worldview of their decision makers. The sense of purpose, vision and commitment of an organization's leadership play a critical role in the results it can accomplish.

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Corporate Restructuring An Overview November 2004 Author: Harris A. Samaras Version 05

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Copyright © 2004 Pytheas Limited

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C ontents F orward 4 W hat is Restructuring? 5 R estructuring Strategies 6 R easons for Restructuring 8 S ymptoms for Restructuring 9 O bstacles to Restructuring 10 S u ccessful Restructuring 11 P reemptive Restructuring 12 P rior to Restructuring 14 T he Restructuring Process 15 M easuring Results 21 D iscussion 22 C onclusion 26 Appendix I – S ell-offs 30 Appendix II – E quity Carve-outs 31 Appendix III – S pin-offs 35 Appendix IV – S pin-ins 39 Appendix V – C orporate Splits 40 Appendix VI – T racking Stocks 42 Appendix VII – J oint Ventures 44 Appendix VIII – A bout Pytheas 47

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F orward Organizations are human systems and their system structure includes the worldview, beliefs, and mental models of their leaders and members. Changing organizational behavior requires changing the belief system of its personnel. This process of changing beliefs, learning, requires clear, open communications throughout the organization. Organizational performance ultimately rests on human behavior and improving performance requires changing behavior. Therefore corporate restructuring should have as a fundamental goal the facilitation of clear, open communication that can enable organizational ongoing learning and clarify accountability for results. Continuous organizational learning is necessary to stay up to date. Organizations that cannot or will not learn will become obsolete. Leaders must periodically examine the structure of their organization to assure that it continues to provide an environment for organizational learning. The points of leverage in organizations are the beliefs and worldview of their decision makers. The sense of purpose, vision and commitment of an organization's leadership play a critical role in the results it can accomplish. Improving performance requires changing behavior 4

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W hat is Restructuring? Restructuring is the process through which an organization radically changes the contractual relationships that exist among its creditors, shareholders, employees, and other stakeholders. It is the corporate management term for the act of reorganizing the legal, ownership, operational, financial or other structures of an organization for the purpose of making it more profitable and efficient. Strategies of restructuring include portfolio restructuring, organizational structuring and financial restructuring. Restructuring is an on-going process. It is a value tool for an organization to use in an attempt to maintain their goals and objectives. The choice of which strategy to use will depend on the area the organization has to improve, i.e. profitability, performance, or operation. The basic nature of restructuring is a zero-sum “game”. It reduces financial losses, while reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation or a situation that requires change. 5 The basic nature of restructuring is a “zero-sum game”, a “marginal utility”

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R estructuring strategies Organizational Restructuring Strategy In this strategy the terms downsizing, redesign and layoffs are often used. Organizational restructuring will normally change the levels of management in the company, effect the span of control or shift product boundaries. There is also a change in production procedures and compensation associated with this strategy. Reduction in the work force is the main by-product that accompanies organizational restructuring and is the reason for the least positive impact on organizational performance. Financial Restructuring Strategy This type of restructuring is identified by changes are in the firm's capital structure. Changes can include debt for equity swaps, leverage buyouts (LBOs), or some form of recapitalization. In a financial restructuring that is in the form of a LBO, there is an immediate influx of free cash flows, organizational efficiency is enhanced and the company refocuses on the core business. Additionally, long-term performance of the organization is significantly improved after the LBO. Note that LBOs of divisions have greater improvement in efficiency than when the entire company is acquired. 6 LBOs can immediate bring free cash flows and enhance organizational efficiency

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R estructuring strategies Portfolio Restructuring Strategy Companies involved in acquisitions, divestitures, or spin-offs are mainly using a portfolio restructuring strategy. This type of strategy includes selling off those business units that are drawing down operations or spinning off business units to raise more capital. The organization's objective is to regain its perspective on the core business. Portfolio restructuring has the best results when the firm uses the spin-off strategy and count on subsequent mergers rather than sell-offs. 7 Portfolio Restructuring has best results when a spin-off is used

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R easons for Restructuring The three primary reasons for restructuring: To address poor financial performance. Declining or stagnating sales, accounting losses, or a falling stock price are usually the warnings. In extreme cases such poor performance may cause the company to default on its debt, resulting in bankruptcy. To support a new corporate strategy, or to take advantage of a business opportunity. In an equity spin-off, for example, a diversified firm's businesses are split apart into independent entities, each with its own common stock. Spin-offs can make sense when a high-growth business is being held back by a bureaucratic corporate parent, or when it no longer makes sense for a company to be vertically integrated. In this case, a sign that restructuring may be necessary when the stock market is valuing the entire company for less than what its separate businesses would be valued for if they were separate, independently-traded companies. Restructuring is required to correct a large error in how the company is valued in the capital market. To correct a large error in how the company is valued in the capital market. In large diversified companies that operate in many different businesses even if the businesses may be well-run, investors may place too low a value on the overall portfolio. Restructuring tools like tracking stock, stock buybacks, or leverage buyouts, can be used to reduce this kind of value gap. 8

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S ymptoms for Restructuring Symptoms indicating the need for corporate restructuring include: The market(s) perception about the organization is deteriorating. The company has difficulties in paying or is unable to pay off its debts. Sales are declining. Stock price is falling. New skills and capabilities are required to meet operational requirements. Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals. Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and inefficient. Technology and innovation are creating changes in workflow and production processes. Significant staffing increases or decreases are contemplated. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating. 9 Lack of new skills, overstaffing, understaffing, signal the need for restructuring

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O bstacles to Restructuring Common obstacles to restructuring include: Denial of acknowledging problems: Organizations have tended to restructure only reactively in response to pressure and when action has become unavoidable. Saving jobs: Observed mostly in governmental organizations characterized by lifetime employment and seniority-based promotion employment security, saving jobs even at the expense of shareholder interests continues to sway executive decision-making. Internal politics and long-held tradition: Restructuring efforts can fail because the initiatives are not followed group-wide and are changed shortly after announcement, when politics and tradition stand in the way. Executives' disregard for shareholder value: Organizations divest their businesses, those businesses are often incurring heavy losses as a result of several years of poor performance; executives can be reluctant to divest underperforming businesses, even when they know that the divestiture will maximize the value for shareholders. Arrogance: Executive management believes that it knows how to solve the problems without outside help often ignoring changing market dynamics. 10 The key is to recognize the problem as early as possible

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S uccessful Restructuring Key factors for successful restructuring include: Setting specific short- and long-term objectives to be achieved through restructuring; Planning growth scenarios after restructuring in advance; Defining core businesses and focusing on them; Developing a restructuring plan toward superior shareholder value; Demonstrating leaders' commitments to restructuring; Sharing a restructuring plan across the group organizations; Setting objective criteria to identify candidates for restructuring; Assessing restructuring alternatives and selecting the best option; Finding the right partners to complete the transactions; Executing restructuring in a swift and intensive manner; Monitoring the progress of a restructuring plan on a regular basis; Involving external advisors in the restructuring process. 11 It is key to share the restructuring plan across the group organizations

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P reemptive Restructuring Organizations could benefit by restructuring before they are hit with a crisis; a preemptive restructuring may often be appropriate. If an organization waits too long to address problems with its business, the resulting restructuring may be very painful as the options remaining will definitely be fewer. A preemptive restructuring may deter executives from taking the full measures that are necessary to return the business to a sound footing whereas a resulting restructuring may severely disrupt the business. If, for example, it is necessary to layoff 20% of your workforce to achieve the same cost efficiency as your competitors, better to do this over several years than all at once. The key is to recognize the problem as early as possible. Organizations must perform a "restructuring audit" on their businesses periodically, looking for opportunities to create value by voluntarily restructuring, before circumstances leave them with no choice. 12 Preemptive restructuring can act as a deterrent to painful surprises down the road

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P reemptive Restructuring Preemptive or not restructuring initiatives fail when issues are overlooked or approaches undertaken are unrealistic . Key points the Board of Directors (BOD) should consider before restructuring : 13 Balancing short- and long-term risks How is the employment brand managed? Could proposed measures damage the future business strategy? What steps should be taken so that key talent is retained? How is the development of staff continued whilst restructuring? What is the market impression about the organization? Adding value What is the organization’s core business (Units, products, services and customers that bring cash into the business)? How should the redesigned organization look like? Is the organization efficiently functioning and does it obtain true value for money? Engaging effectively with staff Is the approach to restructuring consistent with the organization’s declared values ? Are effective communication plans in place? Is management engaging with staff in an appropriate manner? How does staff feel about being part of the organization?

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P rior to Restructuring Prior to restructuring: Make sure that that the organization’s owners, leadership team and directors are personally protected. When the organization is in trouble or under restructuring, it is vulnerable to lawsuits from creditors and others wanting to cash in on its distress. The organization should make sure that its top leaders are protected by a Directors and Officers policy. Real estate planning should be encouraged to help protect personal assets against personal lawsuits. By knowing that everyone is “safe”, the organization can focus and devote all efforts against restructuring. Oversee all cash collections and payments. The CEO must take complete control of cash (how, depends on the size and existing structure of the organization). If cash is controlled it cannot be overspent. Prior to restructuring directors should be personally protected 14

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T he Restructuring Process As companies are coming under more pressure to create shareholder value they will become engaged in divestitures of underperforming business units or subsidiaries. The pattern of a typical corporate restructuring process The pattern of a typical corporate restructuring process calls for an organization to stabilize its financial situation, return to profit and then focus on growth. If companies incur excessive debts and suffer from deteriorating cash flows, short-term measures will need to be taken immediately to generate cash for debt payments and stabilize the financial situation. To release cash (and thus reduce debts), organizations can sell off fixed assets or underperforming businesses and rationalize working capital, e.g., accelerate debtor collections, extend creditor payments or reduce inventories. The priority in this phase (financial restructuring), is to stabilize financial situations. In parallel, companies will need to strengthen their core businesses so that they can generate enough cash to finance subsequent growth initiatives; no growth initiatives can commence without having strong core businesses. To improve profitability in core 15 Cash is King! Determine what generates cash and what drains it

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T he Restructuring Process business, companies must redesign and streamline business processes. Such efforts can be extended to the entire supply chain; business rebuilding. This involves the whole range of the organization’s business activities, including strategies and individual business processes (financial and operational restructuring). When organizations have improved the efficiency of their core businesses sufficiently, they are poised to shift emphasis from short-term profitability to long-term profitable growth. To sustain growth, companies need to launch new products and develop new markets; value-building growth. Growth initiatives usually take several years to yield results. Consequently, companies will need to consider front-loading of growth initiatives. In many cases, business rebuilding and value-building growth take place simultaneously rather than one after the other. However, unless the company undergoes organizational restructuring it is more than likely that the inefficiencies that forced the company to undergo financial restructuring in the first place will surface again. 16 Ongoing organizational restructuring is a must for every company

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T he Restructuring Process Alternative Divestiture Structures There are three basic ways to divest a subsidiary: sell-off, equity carve-out and spin-off. Other methods of divesting a subsidiary include corporate splits and tracking stocks. Corporate splits are commonly used to effect intra-group corporate restructurings and to prepare a business for divestiture. A tracking stock is a specialized option for a parent company to realize hidden value in a business unit or subsidiary while retaining control of the unit or subsidiary concerned. Moreover, a spin-in is the acquisition of minority shares in majority-owned subsidiaries. Consequently, majority-owned subsidiaries become wholly-owned subsidiaries. In many cases spin-ins are executed with the aim of implementing group-wide restructuring and are followed by further divestitures. Last but not least, a joint venture can be used as a means of acquiring or exiting a business in two stages. In the first stage, a parent company and its partner company create a joint venture company. In the second stage, the parent company sells its remaining shares of the joint venture to the partner after a certain period of time. 17 Basic ways to divest are Sell-off, Equity carve-out, Spin-off

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T he Restructuring Process To achieve value-building growth, companies must develop and maintain balanced business portfolios. No growth can be achieved without having strong core businesses; cash flows generated by core businesses are essential to fund for growth initiatives. Yet strong core businesses alone do not guarantee value-building growth. To develop and maintain balanced portfolios, the challenge is to nurture promising options while reviewing frequently the growth potential of each business and divesting quickly underperforming businesses with diminishing potential or distracting noncore businesses. Growth initiatives call for funds, management time and other resources. Divestitures of underperforming or non-core businesses can often release tied-up resources and thus can create capacity for growth. The two cornerstones of successful divestitures are: Deliberate use of interim solutions to an eventual exit; and Laying the groundwork for creating a stand-alone entity. 18 Strong core business alone does not guarantee value-building growth

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T he Restructuring Process The methodology of restructuring is basically based on a strategic planning process. This consists of three phases : The Diagnostic Phase. Diagnosis of the company through Strategic Appraisal and Due Diligence (Financial, Operational, Macro-Environment, Legal). The Planning Phase. Preparation of the Strategic Improvement Plan. Define corporate objectives and strategies. The Implementation Phase. Restructuring, including monitoring of progress and revisions of the previous phases. Important Restructuring is more likely to be successful when management first understands the fundamental business/strategic problem(s) or opportunity that their organization faces. The decisions that management will have to take as part of implementing a restructuring plan are critical to whether the restructuring succeeds or fails. Time is of essence. People need certainty. Management commitment to the process is critical 19

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T he Restructuring Process 20 The Restructuring Process chart

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M easuring Results Results of restructuring strategies can be measured by one of two performance standards, i.e. market performance or accounting performance. Market performance The market performance standard addresses the stock price of the organization following a restructuring. The changes can be directly attributed to restructuring action are short term indicators of how the restructuring has effected the organizations performance. Accounting Performance To determine long term performance of an organization accounting standards (financial ratios) are used to calculate restructuring performance. A comparison is made on financial ratios ROI (Return of Investment) and ROE (Return on Equity) of pre-restructuring and post-restructuring data over several periods and years. The results using this method take longer to obtain but can give a clearer picture to whether the restructuring objectives have been met. 21 ROI and ROE comparison of pre- and post- restructuring can measure restructuring results

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D iscussion Corporate overhead allocation between the subsidiary and the parent can be complicated Before an organization can divest a subsidiary through, say a tax-free spin-off, management must first decide how corporate overhead will be allocated between the subsidiary and the parent. The allocation decision can be complicated by management's understandable desire not to give away the best assets or people. It is also necessary to allocate debt between the two entities, which will generally entail some kind of refinancing. The transaction must meet certain stringent business purpose tests to qualify as tax-exempt. And if the two entities conducted business with each other before the spin-off, management must decide whether to extend this relationship through some formal contractual arrangement. Corporate downsizing challenges include managing relations with remaining workforce and press Corporate downsizing presents management with formidable challenges. In addition to deciding how many employees should be laid off, management must decide which employees to target (e.g., white collar vs. factory workers, domestic vs. foreign employees, etc.) and set a timetable for the layoffs. It must also carefully manage the organization’s relations with the remaining workforce and the press. This process becomes much more complicated when management's compensation is tied to the financial success of the restructuring through stock options and other incentive compensation. And when layoffs are the by-product of a corporate merger, it is necessary to decide how they will be spread over the merging companies' workforces. This decision can significantly impact the merger integration process and how the stock market values the merger, by sending employees and investors a signal about which merging company is dominant. 22

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D iscussion Restructuring affects also the wealth of the claimholders Corporate restructuring usually requires claimholders to make significant concessions of some kind, and therefore has important distributive consequences. Restructuring affects not only the value of the firm, but also the wealth of individual claimholders. Disputes over how value should be allocated and how claimholders should "share the pain" arise in almost every restructuring. Many times these disputes can take a decidedly ugly turn. A key challenge for management is to find ways to bridge or resolve such conflicts. Failure to do so means the restructuring may be delayed, or not happen, to the detriment of all parties. Sometimes disputes over the allocation of value arise because claimholders disagree over what the entire company is worth. To bridge such disagreements over value, a deal can be structured to include an "insurance policy" that pays one party a sum tied to the future realized value of the firm. This sort of arrangement sometimes appears in mergers in the form of "earn-out provisions" and "collars”. Also in some bankruptcy restructuring plans (although relatively uncommon), creditors can be issued warrants or puts that hedge against changes in the value of the other claims they receive under the plan. 23

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D iscussion “Marketing” the restructuring is critical for publicly traded companies For publicly traded companies, the success of a restructuring is ultimately judged by how much it contributes to the company's market value. However, management cannot take for granted that investors will fully credit the company for all of the value that has been created inside. There are many reasons why investors may undervalue or overvalue a restructuring. Many companies have no prior experience with restructuring, so there is no precedent to guide investors. Restructurings can often be exceedingly complicated and more than often they produce wholesale changes in the organization's assets, business operations, and capital structure. In most restructurings, managers face the additional important challenge of marketing the restructuring to the capital market. A better way to this would be to disclose useful information to investors and analysts that they can use to value the restructuring more accurately. However, managers are often limited in what they can disclose publicly. For example, detailed data on the location of employee layoffs in a firm could benefit the firm's competitors by revealing its strengths and weaknesses in specific product and geographic markets. Disclosing such data might also further poison the company's relationship with its workforce. Management's credibility obviously also matters in how its disclosures are received. Many restructurings try to improve company profitability two ways, by both reducing costs and raising revenues. However, 24

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D iscussion experience suggests that investors and analysts generally reward promises of revenue growth much less than they do evidence of cost reductions. When conventional disclosure strategies are ineffective in a restructuring, sometimes more creative strategies can be devised. Often a new earnings measure, which can correspond more closely to cash flows, has to be designed to educate investors about a buyout's financial benefits. However, acceptance of such an accounting innovation can be uneven at first… On the other hand communicating with investors is relatively easy when the company is nonpublic and/or closely held. But having no stock price can be a double-edged sword since it is then harder to give managers incentives to maximize value during the restructuring… Profit-sharing plans and fixed wage schemes improve corporate productivity No doubt, leveraged restructuring of organizations creates greater corporate value by concentrating more control among fewer stockholders, initiating enhanced corporate efficiency and performance. When management and employees have equity or an equity-like position in the corporation, they have more incentive to improve corporate productivity. Their interests in the corporation more resemble the investors'. Installing a profit-sharing plan in place of a fixed wage scheme improves productivity, as does an Employee Stock Ownership Plan (ESOP). ESOPs create an ownership interest for the present and future, as well as generating their own funding. ESOPs also build debt capacity and tax benefits. Leveraged equity purchase plans are similar incentive packages for management only. 25

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C onclusion Although restructuring is a valued tool for an organization to use in an attempt to maintain its goals and objectives many companies recognize the need to restructure too late, when fewer options remain and saving the organization may be more difficult. The pattern of a typical corporate restructuring process calls for an organization to stabilize its financial situation, return to profit and then focus on growth. In parallel, it must strengthen its core businesses so that it can generate enough cash to finance subsequent growth initiatives. Although focusing on core business alone is not enough! To achieve value-building growth, companies must develop and maintain balanced business portfolios. The key challenge is to nurture growth options while divesting underperforming or non-core businesses proactively. Success in proactive divestitures, a significant restructuring tool, is more likely when companies use deliberately interim solutions to an eventual exit and lay the groundwork for creating a stand-alone entity. Leveraged restructuring creates greater corporate value by concentrating more control among fewer stockholders, initiating enhanced corporate efficiency and performance. 26 Restructuring initiatives fail when undertaken approaches are unrealistic

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C onclusion Restructuring is an on-going process and understanding the relationship between corporate restructuring and its employees is the key not only to improving any organization's ability to move through change effectively but to guarantee everlasting competitiveness. Organizations are encouraged to preemptively restructure. The more extensive the restructuring, the greater the growth prospects; the stronger the growth, the greater the need for restructuring. Organizations need insight into how to best utilize talent and find the best fit between existing employees and the jobs that await them. However, some of these factors are clearly idiosyncratic and company-specific. The organization's relations with the remaining workforce and the press must be carefully managed especially when management's compensation is tied to the financial success of the restructuring through stock options and other incentive compensation. When the organization is a publicly traded company marketing the restructuring is of utmost importance. Disclosing useful information, however, must be wisely done. 27 The stronger the growth the greater the need for restructuring

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C onclusion At the end of the day, whether it is an organizational, financial or portfolio restructuring, a successful corporate restructuring rests on human behavior, a change in behavior; that is, changing the belief system of the people of the organization. Continuous organizational learning is necessary for organizations to stay up to date and excel, and must be the essence of every restructuring. Organizations that are not willing to learn will become obsolete. Important: Organizations must perform a "restructuring audit" on their businesses periodically, looking for opportunities to create value by voluntarily restructuring, before circumstances leave them with no choice. 28 Organizational learning must be the essence of every restructuring

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S ell-offs A sell-off is the sale of a business or subsidiary of the parent company to another firm outside the group, generally resulting in a payment of cash to the parent. In theory, sell-offs are the least complex of restructuring structures. Acquirers can usually be divided into two groups: strategic buyers and financial buyers. Strategic buyers are those who are interested in acquiring a business for strategic purposes, e.g., increasing market share, creating economies of scale or exploiting synergies; they are typically companies engaged in the same business as, and therefore competing with, the business or company under consideration. In contrast, financial buyers are those who are interested in acquiring a business to secure a financial return in the short- to medium-term before selling the business or otherwise exiting the investment. Financial buyers are likely to be buyout firms. Buyout firms raise funds in order to be able to take equity stakes in companies though funding and assisting with management buyouts (MBOs) and leveraged buyouts (LBOs). Buyout firms generally focus on established companies with potential to grow after transformation. Non-core divisions and subsidiaries of large public companies are their typical targets. 30

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E quity Carve-outs An equity carve-out is the sale of an equity interest in a subsidiary to public investors in an IPO or to professional investors in a private placement. Equity carve-outs come in two forms: minority carve-outs and majority carve-outs. A minority carve-out occurs when a parent company sells a minority interest in a wholly-owned or majority-owned subsidiary to investors while retaining the majority interest. A majority carve-out involves the sale of a majority interest in a wholly-owned or majority-owned subsidiary to investors. It should be noted that the preparation for either an IPO or a private placement to professional investors takes longer than that for a sell-off. In addition, a parent company will have to ensure that a carved-out subsidiary should be a viable independent company. This is often the most difficult part of the preparation for an equity carve-out. Main benefits of a minority carve-out: After a minority carve-out, the parent company continues to remain in control of the subsidiary; It allows the parent company to take advantage of a high valuation of part of its operations and provides opportunities to raise capital on advantageous terms;[ 31

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E quity Carve-outs If the minority carve-out unlocks value and a higher-rated or higher value stock is created (in aggregate), the stock of the parent company (or subsidiary) has more value as an acquisition currency; It gives the subsidiary time to become a stronger company before a sale or majority or full carve-out; It may create business opportunities for the subsidiary by demonstrating that the subsidiary will be an independent business; and A minority carve-out IPO allows the subsidiary to offer market-linked or other equity incentives to management. Disadvantages of the minority carve-outs include: The parent company maintains control of the subsidiary, which may cause a potential conflict of interests with the minority shareholders of the subsidiary; If the initial public float is too small, it may fail to attract institutional investors; Small public floats may increase the volatility of the stock; 32

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E quity Carve-outs In difficult markets, a minority carve-out may impede a selling strategy by setting a price for the shares of the subsidiary which is below their "real" value; and A minority carve-out may reduce the flexibility with which the parent and subsidiary can cooperate to capture synergies. The parent should anticipate that a minority carve-out is often an interim solution. In most cases, a minority carve-out is later followed by another transaction, such as a sell-off, follow-on public offering or spin-off. In practice, a minority carve-out is likely to lead to complete separation over time because the carved-out subsidiary tends to drift away from and interact less with the parent due to its independence. In addition, the carved-out subsidiary, if it becomes a publicly listed company, will issue its own financial statements and establish a public market value, resulting in the increased possibility of a merger (or takeover) offer. A minority carve-out IPO may be combined with a later spin-off. If unsuccessful, the minority carve-out may be followed by a spin-in, i.e., the parent company acquires the shares held by minority shareholders and turns the majority-owned subsidiary 33

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E quity Carve-outs into a wholly-owned subsidiary. When a substantial or complete separation is desired, a majority carve-out may be implemented (again usually by way of an IPO or private placement). A majority carve-out is beneficial in the following ways: A majority carve-out may generate substantial cash for the parent and/or the subsidiary; A majority carve-out may allow the parent to terminate its responsibility toward the subsidiary; A majority carve-out means that there will be fewer potential conflicts of interests between the parent and the subsidiary after the carve-out than is the case with a minority carve-out; Notwithstanding that it will only be a minority shareholder, the parent may maintain a significant influence on the subsidiary after the carve-out; and A majority carve-out allows continued financial participation by the parent. Disadvantages of a majority carve-out include: Neither the parent nor its shareholders will participate fully in the upside o f the subsidiary; and The parent will lose control over the subsidiary after the carve-out. 34

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S pin-offs A spin-off (or demerger) often consists of the distribution of a subsidiary's stock to the parent company's existing shareholders by way of a dividend. A spin-off is a popular way of undertaking corporate restructuring in the U.S. and Europe. The main reason for the popularity of spin-offs is that the distribution can often be made tax free for both the parent corporation and the receiving shareholder. This can represent significant savings to the parent company. Spin-offs are a means to unlock the value of a subsidiary and transfer that value directly to the parent company's shareholders. It is especially useful for a subsidiary that does not completely fit with the parent company's core activities or would otherwise benefit from being a stand-alone public company. Spin-offs are also a means to obtain full value for the parent company's shareholders when a spun-off subsidiary is viable but will not command a reasonable price in a cash divestiture because of market conditions. Where the shares of the parent company are publicly listed, in order to ensure that the parent company's shareholders can realize the value of the distribution, the shares of the subsidiary generally need to be (or become) publicly listed to give the shareholders the same liquidity in the shares in the subsidiary as they have in the shares of 35

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S pin-offs the parent, i.e., the parent will need to seek a public listing for the new shares. As is the case with equity carve-outs, the spun-off subsidiary must be a viable stand-alone entity to create shareholder value. This means that it must have a strong capital structure and a viable business model. This poses a major challenge for all spin-offs. In addition, spin-offs have disadvantages, including the following: Unlike an equity carve-out or a sale for cash, neither the parent company nor the subsidiary receives any cash in the transaction itself; The parent company loses the income and cash flow of the subsidiary without receiving any cash in return; Unlike a carve-out IPO, the shares are distributed to the parent's shareholders as a dividend and therefore the parent company may not work hard to create investor interest in the stock as much as in a carve-out IPO; and If the spun-off subsidiary fails to meet their investment criteria (e.g., minimum size of market capitalization or portfolio holdings), institutional investors of the parent company may sell the shares distributed to them in the spin-off. 36

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S pin-offs A carve-out IPO may be combined with a later spin-off. The advantages of such two-stage transactions include the following: The IPO establishes a public market for the subsidiary’s stock in advance of the spin-off; The scrutiny which comes with being a publicly listed company should make the subsidiary a stronger company; and The IPO generates cash for either the parent company or subsidiary or both. The disadvantages of these two-stage transactions are similar to those of minority carve-outs, including: The IPO is dependent on equity market conditions; Preparing for and implementing the IPO is time consuming; Companies with small public floats are less attractive to institutional investors; and A depressed stock price may prevent the parent from undertaking the subsequent spin-off. A split-off is a variant of a spin-off. In a split-off, a parent company distributes shares it owns in a subsidiary to its shareholders in exchange for their shares of the parent. A split-off is a way to 37

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S pin-offs create value for the parent's shareholders by reducing the parent's outstanding shares. Reducing the parent's shares outstanding increases the earnings and cash flow per share and, thereby, the value of the remaining shares. A split-up is a form of split-off where a parent company is broken up into two or more independent companies. In the split-up, a parent company is often liquidated and the parent company's shareholders become shareholders of each of the new independent companies. 38

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S pin-ins Increasingly, companies are making majority-owned subsidiaries into wholly-owned subsidiaries. Such transactions are referred to as spin-ins. Often spin-ins are implemented through the share exchange procedure. Spin-ins allow a parent company to implement group-wide restructuring by streamlining overlapping businesses and redeploying assets and capabilities within the group. Consequently, spin-ins will often lead to divestitures. 39

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C orporate Splits The corporate split procedure makes it easier for companies to split business units into new companies (or existing companies). Prior to the introduction of the corporate split procedure, it was possible for a company to split a business unit into a new subsidiary through either an investment-in-kind or a post-establishment transfer of business. However, the traditional methods to complete such transactions were expensive and time consuming procedures. For example, an asset valuation by a court appointed inspector was required. A corporate split which does not involve the distribution of shares directly to the shareholders of a transferor company) enables a parent company to: Focus on core businesses; Improve the control span of the parent’s management team by reducing parental involvement; and Accommodate differing personnel and compensation systems. 40

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C orporate Splits At the same time, such splits enable a parent company to unlock the value of a business unit by: Clarifying the business unit’s responsibility and authority; Providing a certain degree of autonomy to foster an independent culture; Expediting the business unit’s decision-making to improve business performance; and Enhancing visibility for customers, suppliers and potential alliance partners or buyers. More significantly, corporate splits facilitate the participation of strategic partners who can provide necessary capabilities. 41

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T racking Stocks Tracking stock is a class of parent company common stock that provides a return to investors linked to the performance of a particular business unit within the parent company. In theory, tracking stock can create many benefits for both the parent company and the subsidiary. A tracking stock does not require the parent company to make the tax, legal, governance and organizational changes required for an equity carve-out or spin-off, e.g., no separate board of directors is required. This provides the main appeal to the parent company over other alternatives. The advantages to using tracking stocks include: The parent company continues to control the business unit and maintain ownership of its assets; A tracking stock can raise capital on attractive terms; A publicly listed tracking stock establishes a market value for the business to which management compensation programs can be tied; A tracking stock preserves the operating benefits of a single, integrated corporation; and The parent company may use the tracking stock as acquisition currency. 42

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T racking Stocks The disadvantages of a tracking stock include the following: The parent company issuing a tracking stock must create financial "firewalls" between the business and the rest of its operations; The parent company will shoulder the administrative burden in connection with a tracking stock; A company that issues a tracking stock creates the potential for a conflict at the board level between the interests of the two sets of shareholders; and Investors may not give as much value to the tracking stock as if shares represented a direct ownership interest in the assets of the tracked business. Tracking stocks are often terminated when the circumstances and objectives of the business and/or parent company change and consequently the parent company decides to sell, spin off or spin in the tracked business. 43

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J oint Ventures When well crafted, joint ventures (JVs) can achieve many of the same objectives for the parent company as an acquisition of the other company, including access to the resources and capabilities of the joint venture partner, but at a lower cost and without many of the risks associated with an acquisition. Consequently, the parent can increase the value of a subsidiary by way of a JV. Successful JVs are often followed by IPOs. Joint ventures may be also used as a means of divesting a business. The first step is the creation of a JV with a strategic partner. Often the strategic partner controls a major stake (i.e., over 50%) in the JV company. The second step is the acquisition of the minority shares of the JV company by the strategic partner. Such two-stage transactions provide the acquiring partner with benefits, including the following: A means to encourage the partner to assist in building the business; A means to get to know the business before a subsequent acquisition; and A means to lay the groundwork for smooth integration after a later acquisition. Buy-out firms are active buyers of non-core subsidiaries of large public companies. 44

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J oint Ventures Although JVs are not their traditional business model, buyout firms may be interested in forming JVs. Such buyout partnerships can be used as a means of divesting non-core businesses when a cash sale is unavailable or undesired. The advantages of a buyout partnership for the parent company and the subsidiary include: A means to encourage the partner to assist in building the business; Experienced buyout firms can greatly assist in building the subsidiary, recruiting a management team, forming relationships with customers and setting business strategy; Buyout firms invest cash into the subsidiary and assist in funding key business initiatives; The involvement of experienced and respected buyout firms may be a significant asset to the subsidiary in a later IPO. The challenges of a buyout partnership for the parent company and the subsidiary include: A buyout firm may not invest in an entity when the parent company is in control;; and Buyout firms are usually interested in executing an exit strategy within a reasonable time frame. 45

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A bout Pytheas Like Pytheas, the ancient Greek explorer, scientist and businessman we provide access to markets inviting our partners to wander the paths and explore the places with a partner that possesses, knowledge of prevailing market dynamics, thorough industry expertise, and above all keen awareness of geographic idiosyncrasies… Pytheas is an organization with global outlook, offering a wide range of sophisticated financial services to companies, governments, institutions, and individuals. Considered as one of the world's premier organizations in providing access to emerging financial markets and economies in transition, Pytheas services range from advising on corporate strategy and structure to raising equity and debt capital and managing complex investment portfolios. Pytheas' investment management capabilities are among the best in the industry, offering a wide range of investment products and solutions for the investment issues faced by our clients throughout the world. 47

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P ytheas Main Services Capital Raising Emerging Markets Research Strategic Advisory Investment Management Business Development Distress Management Risk Management Credit Rating Guidance Investment Banking Advisory Corporate Finance M&A Real Estate Private Credit Equity Finance Minerals & Mining 48

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P ytheas – Company Pulse Visit Pytheas Company Pulse 49

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P ytheas Investors Service The Pytheas Investors Service was established as a vehicle for capital and investment to advise Pytheas’ clients on how to shape tomorrow’s business global map – to be a catalyst for growth, development and diversification by better positioning Pytheas’ clients in the global markets and in their quest for excellence. In close cooperation with the rest of Pytheas’ professional network, it assists and guides clients to clearly identify and establish appropriate investment opportunities through in-depth research and analysis of the world's equities, industries, and markets. Product experts, country specialists and industry analysts work in close unison and pool their talent to design, recommend, and, when appropriate, customize and fine-tune investment strategies that clients can act on in keeping with their portfolio preferences and imperatives. The breadth and quality of Pytheas' fundamental research and strategic advice, combined with its in-depth industry knowledge and geographic specialization, offer investor clients a wealth of information to evaluate and prioritize their investment decisions. 50

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Copyright © 2004 Pytheas Limited Disclaimer The above notes have been compiled to assist you; however, actions taken as a result of this document are at the discretion of the reader and not PYTHEAS or Harris A. Samaras. All rights reserved. The material in this publication may not be copied, stored or transmitted without the prior permission of the publishers. Short extracts may be quoted, provided the source is fully acknowledged.

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