Spinoff versus Sell-Off Decision
There are multiple options when one company decides to separate a business from the entire corporation. These may include a divestiture or sell-off, an outright sale of the unit, or a spinoff.
Companies with overvalued assets based on their intrinsic value usually sell off the business to maintain value. This is based on an analysis by Prezas and Simonyan, where they examined 4200 sell-offs and 378 spinoffs from 1980-2011.
On the other hand, companies tend to choose spinoffs when they have lower valuations. This is also the best decision when investors have too many demands. These demands can be too strong that it can result in improved values for shareholders of the entity. Another finding is that spinoffs produce higher values even though divestitures can also produce great wealth.
Spinoffs and Bondholder Wealth
Despite the positive shareholder effects, spinoffs make us question if these responses come at the expense of bondholders. In early studies, there was not enough proof of wealth transfers.
However, a new study by Maxwell and Rao found a negative return on bondholders. After analyzing the bond market responses in 80 spinoffs from 1976-1997, they reached this conclusion.
They also considered the loss of collateral value, as well as bankruptcy protection from the spinoff vital in the outcome. This is buttressed by their conclusion that organizations would have their bond rating minimized in the period of the spinoff.
This loss of bondholders is different from the gain of shareholders and an increase in the firm value. The average gain for shareholders is 2.9%, while the firm value increases at about 1.6%. However, this positive return is only an aspect of the bondholders’ wealth transfer.
Wealth Effects of Spinoffs on Shareholders
This section discusses the impacts of spinoffs on shareholders through different lenses.
The US vs. Europe
Most studies about sell-offs and spinoffs highlight US companies. But in Europe, spinoffs are usually caused by “governance earthquakes.” According to Boreiko and Murgia, governance adjustments include the designation of a new CEO or a danger of a takeover This is based on an evaluation of 97 European spinoffs.
According to Shimizu and Hitt, the appointment of a new CEO triggers divestitures. This study is based on their evaluation of US divestitures. In England, corporate spinoffs are more likely to happen than in any other part of Europe. In Europe, the typical ownership structure is more concentrated rather than in England or the US. This puts mainland European shareholders in a less compelling position than their British partners. This does not apply to those large controlling equity holders that are related to family.
Boreiko and Murgia’s sample of European spinoffs presented positive shareholder impacts. Their results also support findings in the US, where they found a 5.7% effect in focus-enhancing spinoffs than for non–focus-enhancing deals (3.3%).
Nonetheless, there was no advancement in terms of operating performance at parent companies after the spinoff. They only found this effect on the spun-off firm. The improved entity that was spun off did not convince the parent to be more focused. Conventionally, they internally grow it. This contradicts the research on US spinoffs, which revealed improvements in performance for focus-enhancing deals.
Wealth Effects of Voluntary Defensive Sell-Offs
When they use voluntary sell-offs as a defense against takeovers, there may be no positive wealth effects. While researchers Loh, Bezjak, and Toms found positive wealth effects on shareholders, there is no positive effect when companies use sell-offs as an antitakeover defense.
The researchers used 59 firms from 1980 to 1987, where 13 were speculated targets of the takeover. They found a 1.5% increase means an aberrant return over a one-day duration until the sell-off date.
But when two samples were created from the division of the sample, the 13 targets didn’t show changes in wealth. This implies that the market treats purchases differently without considering a positive change when firms engage in sell-offs as an antitakeover strategy.
Involuntary Sell-Offs’ Wealth Effects
Most pieces of literature regarding the sell-offs’ effects on stockholder wealth show the wealth increase of the parent company stockholders. They also show that the market efficiently looks forward to the event. This means the stock price reaction happens before the actual sell-off date. The effect of a parent company forced to divest a profitable portion is different from that of an unwanted subsidiary.
For example, Santa Fe-Southern Pacific received its ominous decision requiring it to strip itself of the Southern Pacific Railway. The stock price declined and a takeover target occurred
Another study in 1981 by Kudla and McInish tried to find out the effects of Louisana-Pacific Corporation’s forced spinoff by the parent company, Georgia-Pacific. The FTC enforced these.
It found that the securing of 16 organizations in the southern United States would bring about an anticompetitive focus in the pressed wood industry. It represented an aggregate of 673,000 sections of land of pine trees. The researchers also found that Georgia-Pacific’s stock price had been declining before the FTC complaint through cumulative residuals. These residuals adjust for market effects. In 1972, the company spun off and the stock price rebounded. Despite this, the cumulative residuals were not able to recover completely from 1971 to March 1974
According to Miles and Rosenfeld, the wealth of bondholders minimized after the spinoff while stockholders’ increased. One vital aspect here may be the lower cash flows after the spinoff, as well as the risk of bondholders.
Kudla and McInish Study
Kudla and McInish measured these risks in the context of Louisiana-Pacific’s involuntary spinoff. They tried to analyze the betas of the company before and after the spinoff.
The betas reflect any change in the systematic or undiversifiable risk The scholars also concluded that there’s a large statistically significant increase in the betas of the company post-spinoff. The increase of the perception of the market that Georgia-Pacific made decreased monopoly power after the spinoff caused this. This then caused the firm to carry more risks.
This may imply that a forced divestiture mandate made by the government will have an adverse impact on the stock price of the divesting firm. For instance, Ellert reviewed 205 defendants in antitrust merger lawsuits. He found a 21.86% decline in the equity value during the month the complaints were filed. The timing of the effect as well as the reversal of the declining trend is addressed by Kudla and MicInish.
There must be an increase in the value of the firm’s competitors’ equity if antitrust enforcement is effective in reducing the monopoly of the selling firm. However, the authorities have little help for their activities in the stock prices of the stripping firms’ contenders. There was no significant response by the value of the competitors’ equity to mandated sell-offs done.
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Different Classes of Antitakeover Measures
Takeovers are pretty common in M&As. This is why in order to protect a company, there are different classes of antitakeover measures. We will discuss all of those today.
One of the most priorities in running a business is to protect your company from a takeover. This is because a lot of shareholders and competitors are always planning a takeover. They do so to increase their stock shares – this is especially true if a company is successful.
Takeovers must be prevented. Furthermore, you can do so with the assistance of antitakeover measures.
Main Classes of Antitakeover Measures
Poison Pills
The first class of a preventative antitakeover measure is called “Poison Pills.” It is one of the most common preventative measures against hostile takeovers.
Basically, poison pills are securities placed around the company. It makes a company look less valuable in front of hostile bidders. If the bidder or competitor thinks that a company is less valuable than it actually is, they will put their focus somewhere else.
It truly is a competent form of defense. There have been countless instances where poison pills were used in order to protect a firm from a hostile takeover.
In 1982, Martin Lipton, a well-known takeover lawyer, invented the strategy of Poison Pills. Lipton used the strategy to defend El Paso Electric in its battle against General American Oil.
Then, in 1983, Lipton used the same strategy for the Brown Foreman vs. Lenox takeover contest. Know that there are different specifications of poison pills; this is very vital.
In a prior discussion, we went through this briefly. These different categories of poison pills are effective when it comes to dealing with raiders who want to achieve controlling influence over a company. Additionally, poison pills give higher return rates for companies.
Corporate Charter Amendments
The next class of antitakeover measures are known as the corporate charter amendments. Now, most people often confuse this with the corporation bylaws. However, they are not the same.
In fact, there are a lot of differences between corporate charter amendments and corporation bylaws. The board directors often establish corporate bylaws. They give the important rules for each company.
Corporate charter amendment is a more fundamental document. This document states a company’s purpose. It also contains the different classifications of shares a company may have.
Sometimes, a corporate charter amendment is called the articles of incorporations. Usually, shareholders are required to change or revise the articles of incorporation.
Looking at all of these from a merger and acquisition standpoint, the corporate charter needs to have an action such as staggering the board of directors. Now, in order to implement this, the shareholders need to approve it first.
If the corporate charter doesn’t state anything of sort before a hostile bid, then there is an increased likelihood that the shareholders may shun it.
This is crucial: keep in mind that the differences in the corporate charter are part of common anti takeover measures. State laws will dictate the extent to which these may be implemented. Now, every state has different laws, so you and your lawyers must remember this.
Antitakeover Measure Goal
As the word suggests, the goal of an antitakeover measure is to prevent a hostile takeover. Or, to make it more difficult for any hostile bidder to get managerial control over a company.
Using the methods we discussed above will make it more difficult for a hostile acquirer to change anything about a company. They will find that the task requires more time, energy, effort and money. In the end, they will think twice before making a hostile move.
A portion of the more normal antitakeover corporate contract changes are as per the following: staggered terms of the top managerial staff, supermajority arrangements, fair value arrangements, double capitalizations
Can These Measures Help?
Yes, they definitely can. You have to keep exploring and studying these common antitakeover measures in order to see how you can use it for your own company. Most giant companies utilize both strategies. This provides a layered security around the firm.
The better and higher the security, the more difficult it is for hostile bidders. Think of your company as a valuable asset, because it really is. The more individuals perceive how significant your organization is, the more they will need to dominate.
These preventative measures should be in place when that happens. It allows you to have peace of mind that your firm is in good hands no matter how hard a competitor tries.
Learning about these is crucial for every firm. It permits you to have better control of your firm, and better assurance for your entire organization.
As a leader, you need to be able to take these matters, learn from them and utilize these strategies for the better. You can also use the data you have absorbed from here to take over different firms and competitors.
It is also crucial to have a team of corporate lawyers and attorneys handling your company. They will be beneficial in your pursuit to protect your firm.
This is why there are countless companies who have lawyers in retainers. Most firms face countless threats on a yearly basis. Having a sound, smart strategy and the right people by your side can help you create the best defense and offense.
These antitakeover measures are just some illustrations of what you can do to conserve your firm. There are incalculable ways you can do so. Explore our encyclopedia for more data on what you can do as a leader.
Mergers and Acquisitions Encyclopedia
Antitakeover defenses are popular in the corporate world; especially in M&As. This is why there are a lot of antitakeover defenses and tactics discussed on our website.
You can find a lot more information about these different tactics if you go through our mergers and acquisitions encyclopedia. You can find information about mergers, acquisitions, strategies, state laws, financing, trading, buyouts, diversification, market history and more.
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What Are Spinoffs?
For the past few articles, we have mentioned the word “Spinoffs” several times. We discussed what it is in passing. Today, we will dive deeper into what spinoffs are, and the role they play in corporate restructuring.
What Are Spinoffs?
Spinoffs are a large part of the corporate restructuring strategy. In spinoffs, the parent company often handouts shares in the parent company in the business it is getting rid of. The said shares are given to investors according to their interest in the founding organization.
For the most part, spinoffs are an alternative to outright divestiture. As you may recall, in divestitures, the company sells the unit and receives cash or other consideration.
MetLife, Inc.’s 2017 spinoff of Brighthouse Financial is a great example. Brighthouse Financial is MetLife, Inc.’s United States life insurance and annuity business.
They were motivated to do the spinoff because of their desire to separate the slow-growth U.S. life and annuity business from the rest of the company. Additionally, that had hoped that an independent spinoff such as Brighthouse might be more nimble on its own. There’s even a chance of it growing faster.
What Happens After Spinoffs?
After the parent company decides to separate a division and turn it into a spinoff, the spun-off entity becomes a completely separate business. Which means that these entities are completely independent of the parent company.
Yes, both the parent and the spinoff are two separate companies that operate independently. However, they do share the same shareholders.
How does this happen, you ask? Well, there is a pro-rata distribution to the parent company’s shareholders. This is usually done through what they call a dividend.
Now, because they do the spinoff through the payment of a dividend, courts usually regard dividend payments as part of the normal responsibilities of the board of directors. At the end of the day, shareholder approval is usually unnecessary unless the amount of assets they are trying to spinoff is substantial.
In a spinoff, the shareholders involved in the transaction may stay the same as the original company. On the other hand, an equity carve-out may need to establish a new set of shareholders. We will discuss more equity carve-outs in a later article.
Keep in mind that there are other variations that the parent company can try. This includes a sponsored spinoff.
What Are Sponsored Spinoffs?
Sponsored spinoffs happen when an outside party acquires an interest in the spun-off entity. They often do this by giving the sponsor an incentive. Usually, incentives like these come in the form of a discount on the price of the shares.
Additionally, the spun-off entity and the remaining parent company divides the debt of the overall company. They typically do this in relation to the respective post-transaction sizes of the respective business.
For instance, if the company has warrants and outstanding convertible debt, they may need to adjust the conversion ratio. This is while the stock price of a company may adjust downward. Usually, this happens in the case of more significant spinoffs.
Additionally, shareholders may directly gain by maintaining their original shares from the parent company. They will also receive their shares in the spun-off entity.
If they don’t consider it carefully, warrant and convertible debt holders may not realize gains. Hence, it is vital to take these factors into account when structuring a deal.
Usually, spinoffs are easier to implement. These are also a less expensive option as opposed to equity carve-outs. For instance, there was a study that concluded that it is four times as expensive to implement a carve-out compared to spinoffs.
On another note, spinoffs are less time-consuming to implement than equity carve-outs. If the spun off business is well integrated into the parent company, then there will usually be more work to do. However, if the business was a prior acquisition that was not well integrated into the parent company, the job is so much easier.
Trends in Spinoffs
The dollar volume of spinoffs varies. However, it does somewhat follow the M&A volume. For instance, spinoff volume in the United States fell after the subprime crisis, just like in mergers and acquisitions. It spiked back up in 2011 only to fall again. It also happened worldwide; in Europe, in Asia, and more.
Tax Treatment of Spinoffs
Another great advantage of a spinoff is that it may qualify for tax-free treatment. Compared to outright divestitures, spunoff entities may be eligible to be tax-free.
Naturally, there are certain requirements by the IRS or the Internal Revenue Code that must be met. Discussing these rules will be far too time-consuming and complex. Tax attorneys are crucial at a point like this. Companies have tax attorneys on retainers specifically for these cases.
Tax attorneys are important for M&As. However, in spinoffs, they are most especially needed.
For instance, the parent company must own at least 80% of the shares of the spin off entity to qualify for tax-free treatment. In addition to that, the parent company must not have acquired control of the unit less than five years ago.
These are only examples of the requirements you will need. These types of transactions must also satisfy the business purpose test.
Shareholder Wealth Effects of Spinoffs
It comes as no surprise that the market likes spinoffs. These transactions accomplish many of the same objectives as divestitures. However, it must be done without the possible adverse tax effects.
There are instances when activists believe that a unit could be readily sold at an attractive premium. If the company includes some unattractive parts, it would be more difficult to sell the overall company.
Once the spinoff is done, the newly spun-off entity may be more of a pure play. It is now allowed to be a more focused business. This is the reason it might be simpler to discover vital purchasers for the business.
If the parent company does this right, they may be able to realize a premium on the marketable part of the business. This leads to releasing value to investors.
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Round-Trip Wealth Effects
Most of the time, the market responds negatively when a corporation declares an acquisition. In a previous article, we reviewed a research that indicates a positive response when a company announces a sell-off. So, this makes one wonder: what is the net, round-trip wealth effect? In the present conversation, we will center on that and more.
In their research, Marquette and Williams went through 79 acquisitions, and 69 spin offs between the years 1980 to 1988. Their research focused on examining the shareholder’s round-trip wealth effects of the acquisition. And, of course, the subsequent spinoffs of the acquired entity.
Marquette and Williams tried to see if flips (paired acquisitions and sell-offs) generate on average positive or negative values. The flip is a terminology used mostly in real estate.
You can say that a merger and acquisition has a positive impact if the value was positive. However, their results did not actually indicate a positive or negative effect. The response was mostly neutral. Even though they found negative effects for acquisitions, and positive effects for sell-offs, the research ended up with combined effects that were not statistically significant.
Round-Trip Wealth Effects: The Exception
However, there was an interesting exception in their round-trip wealth effects research. When the target was an R&D, or a research and development intensive business, the net effect was positive. This is, of course, if there is evidence that the parent may have invested capital to fuel the target’s R&D needs.
Hypothetically speaking, we could think of this type of effect when a gigantic capital-filled conglomerate acquires a growing R&D-intensive business. In here, the parent has the authority to speed up the target’s growth.
On the other hand, if the parent company’s long-term plans don’t include the target, then the latter can be sold off at a larger value. This is in part based on the parent’s capital contributions during its reign as the owner of the target. And all the more persuading contention can be made for the advantages of monetary collaboration here.
Wealth Effects of Sell-Offs
The conviction that opposite cooperative energy may exist is another significant propelling variable for divestitures and side projects. As we have previously mentioned spin offs, equity carve outs and divestitures are basically the parent firm’s downsizing.
Thus, the more modest firm should be monetarily suitable without help from anyone else than as a portion of its parent organization. There are a few examination considers that have investigated the effect of side projects. They did so by examining the effect on the stock prices of both the parent company and the spin-off.
After that, they compare the effect and the market index. They do so to determine if the stocks experience abnormal performance that cannot be explained by the market movements alone.
In spinoffs, companies have the unique opportunity to analyze the effects of the separation. This is due to the fact that a market exists for both the stock of the parent company and the spin off. The research in the field of sell-offs presents a clear picture of benefits for shareholders.
Price Effects of Voluntary Sell-Offs
It is a given fact that there is a large body of research on the shareholder wealth effects of sell-offs on the selling company. There are also enough studies on the impact on buyers. It is enough to draw meaningful conclusions. Here are some of those round-trip wealth effects studies.
Effects of Sellers
Corporate sell offs show an increase in stockholder wealth. It has weighed an abnormal shareholder return of 1.2%. This data or statistic was derived from a large number of studies over a long period of time.
The equity market clearly and plainly concludes that the voluntary sling of a division is a positive development. This can lead to a heightened value of the association’s stock. There are a lot of great and intuitive explanations for the positive market reaction to sell-offs.
Effect of Buyers
It is also another given fact that the market is not keen on acquisitions most of the time. However, the market is more positive when it comes to acquiring a unit of another company.
Multiple research and studies have shown that the average abnormal return to buyers is also at 1.2%. However, it was also revealed that the Benou et al study heavily influenced the weighted average of the 1.2%. The study showed a 2.3% return.
A majority of the other studies showed returns between 0% and 1%. Nonetheless, the market seems to be positive about the unit acquisitions of other companies. Similar above, there are also a lot of intuitive explanations for both the seller and buyer round-trip wealth effects.
Corporate Governance and Sell-Offs
Most managers are reluctant to sell off a unit. Usually, the sell offs end up being an admission of mistakes. As we all know, managers are reluctant to admit these mistakes.
Between 1997 to 2005, Owen, Shi, and Yawson analyzed a sample of 797 divestitures. The research was consistent with other related research.
They found that divestitures created wealth. However, their most significant contribution to the research literature was to determine the role that corporate governance played in the divestiture decision. Additionally, they determined the magnitude of the positive round-trip wealth effects.
The research found that corporations with more independent boards had a greater positive shareholder wealth effects. The result was similar to companies with large blockholders.
Additionally, the research implies that the decision to divest needs more than the obvious recognition of poor performance on a unit or a poor fit of that unit within the overall company.
It was also heavily implied that management often needs pressure from independent directors. Or, from huge value holders for them to be adequately propelled to make the best choice.
In the US, this type of pressure has often come from hedge funds that acquire significant blocks of stocks. Their goal is to force value-increasing corporate restructuring.
However, in different countries such as the continental Europe, controlling shareholders may be less responsive to the concerns of small shareholders. These are smaller shareholders who oppose the company’s acquisition strategies and who do not want to pursue sell-offs that could release value to the shareholders.
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Divestiture and Spinoff Process
Now that we all know about divestitures and what they are, let’s go over the divestiture and spinoff process step-by-step. Generally, each specific type of divestiture is unique. This means it can happen on a different schedule. However, for this one, we will look at the generalized six-step process.
Divestiture and Spin Off Process
Step 1: Settle on A Divestiture or Spinoff Decision
In this progression, the parent organization’s administration must settle on a choice. They must decide whether a divestiture is the appropriate course of action.
After a thorough financial analysis of different alternatives is complete, then, and only then can they make a decision. Conducting the financial analysis for a divestiture or a spinoff requires a special method. We will discuss this later.
Step 2: Formulate a Restructuring Plan
In a divestiture or spinoff process, the reorganization plan must be formulated. Moreover, there should be an arranged understanding between the parent and the auxiliary organization.
In the event of a spinoff featuring a continuous relationship between both parent and subsidiary, the plan is a must. The said plan should cover necessary details such as the disposition of the subsidiary’s assets and liabilities.
Additionally, the plan should also cover necessary details like the formation of a divestiture team. This said team should include members of management from a cross-section of corporate functions.
This includes human resources, accounting, finance, legal, and more. There are various jobs for this work. This includes different activities such as negotiating with buyers. It can also include handling various HR issues that could arise.
These issues may happen when employees are transferred to another company. Or when some employees are terminated.
Managerial resources should be invested in the planning and implementing the process. Especially when a larger unit is being divested.
For instance, the plan may give a detailed summary of the asset disposition when the subsidiary is keeping certain of its assets. This is while they transfer back the assets to the parent company.
There are also other issues like the retention of employees and the funding of their pension, healthcare liabilities should be addressed.
Step 3: Selling the Business
On the third step of a divestiture and spinoff process, the business must be sold. Companies need to find a buyer.
Oftentimes, they do this by using an investment banker. The investment banker will facilitate the selling process.
In most cases, the seller and their chosen banker will identify possible buyers. Then, they will advertise the company to them.
Usually, the seller and the banker will prepare a confidential memorandum that features a significant amount of relevant information. This information should be appealing to the buyer.
Once the buyer shows interest, a negotiating process will happen. There are likewise cases where there are multiple offers to the seller. In cases like these, the most appealing and advantageous ones will be selected.
Step 4: Getting the Shareholder Approval of the Plan
The importance of the exchange and the applicable state laws will direct to which degree of endorsement is essential. For example, investors must endorse a side project of a significant division of a parent organization.
At the point when this occurs, the arrangement is submitted to the investors at their gathering. The meeting may be normally scheduled, or they may host a special meeting just for this cause.
Moreover, the stockholders must also receive a proxy statement requesting the approval of the spinoff. The materials that the stockholders will receive must address other issues related to the meeting.
Step 5: Registration of the Shares
On the fifth step of the divestiture and spinoff process, the shares must be registered. The SEC or the Securities and Exchange Commission requires a registration of the stocks if the transaction requires the issuance of shares.
They must produce a prospectus. A prospectus is a piece of the enrollment articulation. It is a piece of the ordinary enlistment measure.
The organization must convey the outline to all investors who get stock in the spun-off element.
Step 6: Closing the Deal
In the sixth and final step of a generalized divestiture and spinoff process, it is time to close the deal. At this point, they have completed all the preliminary steps. And they can finally consummate the deal.
Both companies have exchanged and reviewed considerations. The division and the parent organization are separate. This is, obviously, as per a prearranged plan.
Market Liquidity
Earlier, we promised to give you a guide on the methods of the decision to divest a unit. There are various components that can lead an organization to the choice to sell a unit.
Amongst these reasons, the most well-known is poor performance. While this may seem to be the most obvious factor, a study by Schlingemann, Stulz, and Walking says otherwise.
According to their study, market liquidity is a bigger factor. They analyzed over 168 divesting companies between the years 1979-1994. In their study, they concluded that companies in more liquid industries were more likely to be divested.
This is primarily because in a liquid market, the sellers have a better chance to receive the full or higher value for their assets. This is compared to markets that are less liquid.
Schlingemann, Stulz, and Walking also measured liquidity by the volume of assets sold in a given period of time. If there are any unrelated segments as part of a focus enhancement program first in liquid markets can sell better. This is compared to those that face less liquid markets.
Hopefully, this discussion about the Divestiture and SpinOff Process has been helpful and beneficial to you. In the following arrangement of articles, we will go over Round-Trip Wealth Effects and more.
Round-trip Wealth Effects are a big part of mergers and acquisitions. We will go over different studies regarding the subject, and how each one affects the market. Roundtripping is a term often used in financing, businesses, and accounting. See you soon!
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Reasons for Voluntary Divestitures
There are many types of corporate restructuring, one of which is divestiture. A voluntary divestiture is the selling of a part of the corporation. Buyers usually pay in cash, marketable securities, or a mix of the two.
Divestiture can also be voluntary or involuntary. Involuntary divestitures occur when a firm receives a negative review by the FTC. There are times when they require the company to divest itself of a certain division.
Meanwhile, companies may also undergo corporate restructuring through voluntary divestiture. Here are the top causes of voluntary divestitures.
Reasons for Voluntary Divestitures
Poor Strategic Fit of Division
Voluntary divestitures occur more often than involuntary divestitures. Different reasons drive these decisions. For instance, when the parent company wants to move out of a certain le of business since it doesn’t fit their strategic plans anymore.
This can take a lot of deciding if the line of business is doing good in terms of cash flow. But if the company does not align with the plans, a voluntary divestiture is a good option. This good performance can lead to significant divestiture proceeds that the company can invest in pursuing its overall goals.
Reverse Synergy
Synergy is one motive that is associated with M&As. Synergy is the additional gains that happen when two firms combine. When synergy exists, the joined element is worth more than the total of the parts esteemed independently. All in all, 2 + 2 = 5.
Meanwhile, reverse synergy means the parts are more efficient or worth more than they are within the corporate structure of the firm. In a mathematical sense, it’s 4 – 1= 5.
For example, an enormous parent organization can’t work a division productively, though a more modest firm, or even the division without anyone else, might work all the more productively and along these lines procure a higher return.
An example of reverse synergy was in the 1980s when a sell-off was forced unto Allegis Corporation and its previously acquired companies, including Hertz Rent A Car and the Weston and Hilton International hotel chains.
Allegis had followed through on a significant expense for these acquisitions dependent on the conviction that the synergistic advantages of joining the travel industry organizations with United Airlines, its fundamental asset, would more than legitimize the exorbitant costs.
At the point when the synergistic advantages neglected to appear, the stock value fell, making way for an unfriendly bid from the New York speculation firm Coniston Partners.
Coniston made an offer dependent on its analysis that the different parts of Allegis were worth more than the mixed entity
Poor Performance
Some companies prefer to divest divisions simply because they are not profitable enough. A nonprofitable unit might be weakening the exhibition of the overall firm. Such ineffectively performing divisions can be a money related drain on the overall firm.
The execution might be judged by an inability to pay a pace of return that surpasses the parent organization’s obstacle rate—the base return threshold that an organization will use to assess ventures or the presentation of parts of the overall company. A regular obstacle rate could be the firm’s expense of capital.
One example happened was when Procter & Gamble announced that it would initiate a program to sell off up to 100 of its brands in 2014. It left them with about only 70 to 80 brands.
The remaining ones make about 95% of the company’s profitability. The company had been feeling the squeeze from activist William Ackman, who battled that the Cincinnati-based company, established by William Procter and James Gamble in 1837, needed to reduce expenses and dispose of more vulnerable-performing brands.
The organization had been built up with worldwide consumer items colossus through both natural development just as noteworthy acquisitions, for example, 1957 securing of the Charmin Paper Mills. During the 1990s, it gained MaxFactor and Old Spice.
In 2001, it obtained Clairol from Bristol Myers Squibb, and in 2005, it gained Gillette. The issue the organization had is that it had such a large number of brands that didn’t produce budgetary outcomes in line with market expectations. Hence, the company needed to slim down and increase its focus.
Capital Market Forces
A voluntary divestiture may also occur to have better access to capital markets. The joined corporate structure may be harder for investors to categorize. Certain investors may be looking to put resources into steel organizations however not in pharmaceutical firms.
Different investors might want pharmaceutical firms but not steel companies. These two groups of investors may not need to put resources into a joined steel and pharmaceutical firm. However, each group may independently put resources into an independent steel or drug firm.
Voluntary divestitures may give more noteworthy admittance to capital markets for the two firms as isolated organizations than as a consolidated enterprise.
In the same way, divestitures may make companies where investors would like to invest but that do not exist in the marketplace. They call these firms pure plays.
Some think that there are an incomplete market and a demand for certain types of firms unmatched by market securities. The sale of these divisions of the parent company that becomes pure plays helps complete the market.
Market Liquidity for Corporate Assets
Another reason for voluntary divestiture is the market liquidity for corporate assets. An evident factor that must affect the likelihood that a firm may divest a unit is the strength of the demand for the unit. This sensibly would not be the essential factor as one would imagine that business strategy and money related execution would play a more conspicuous job.
Schlingemann, Stulz, and Walking, affirmed the function of the liquidity of the market for stripped assets. They were the ones who dissected an example of 168 divesting and 157 stopping firms over the period 1979–1994. They found that market liquidity clarifies which units of a business they should sell and which ones they should keep. Likewise, with a lot of M&A research, this is a common result.
Cash Flow Needs
An organization may auction a well-performing unit. This is in the event that it experiences tight budget needs, and if the unit isn’t fundamental to its corporate strategy. A sell-off may create the quick advantages of an imbuement of money from the deal.
Organizations that are under budgetary pressure are regularly compelled to sell off significant assets for upgrade incomes. Chrysler Corporation had to sell off its valued tank division in an exertion to fight off bankruptcy.
International Harvester (presently known as Navistar) sold its productive Solar Turbines International Division. They sold it to Caterpillar Tractor Company Inc. to understand the quick proceeds of $505 million. They used the funds to pay Harvester’s short-term debt.
Cash flow factors also drove Hertz’s sales by Ford in 2005 along with the sale by GM of 51% of GMAC in 2006. These divisions were profitable. And had good prices in the marketplace. Both companies used the cash to offset sizable operating losses
Abandoning the Core Business
The offer of an organization’s core business is a more uncommon purpose behind a sell-off. A model of the offer of a core business was the 1987 deal by Greyhound of its transport business.
The offer of a core business is regularly persuaded by the board’s longing to leave a zone that it accepts has developed and presents barely any development opportunities. The firm has effectively expanded into other more productive territories. And the offer of the core business may help account for the development of these more gainful exercises.
Another example of this was Boise Cascade’s choice. It was his choice to sell off its paper fabricating business and become an office items retailer. This was through its earlier acquisition, OfficeMax.
Boise Cascade obtained OfficeMax in 2003 for $1.15 billion. The company obtained it as a component of a vertical integration strategy. But after some time the paper creation business became less marketable while the retail distribution business became appealing. Boise Cascade sold off its paper division to an investment firm in 2008. But its parent, Packaging Corporation of America (PCA) required its paper and packaging assets in 2013.
© Image credits to Miguel Á. Padriñán
Divestitures & Corporate Restructuring
Corporate expansion is usually the goal of mergers and acquisitions (M&A). However, corporations sometimes have to decrease and downgrade their operations.
This need may emerge on the grounds that a division of the organization is performing inadequately. Or basically, in light of the fact that it no longer fits into the association’s arrangements.
The restructuring may also be important to fix a past merger or acquisition that was ineffective. It is a fact that a lot of sell-offs are primarily caused by budgetary problems.
A mix of high leverage and weak industrial need is the primary cause of budgetary problems. However, there’s also the truth that the amount of sell-offs rises when general arrangement volume heightens.
With that said, the sell-off deal volume will, in general, follow the ups and downs of the economy. It is the same when M&As follow the by and large patterns of economic variations.
This is what happened in the USA. It also happened to larger continents such as Asia and Europe.
What is Divestiture?
Divestiture is not the only type of corporate restructuring. There are other types of corporate restructuring. We learned about the different types in a previous article.
A divestiture is a deal of a segment of the firm to an external party. Generally, they pay the selling firm in cash, marketable protections, or a mix of the two.
A decision-making method for attaining divestiture is developed and used to know if a certain portion of the firm is worth retaining. Both of the divesting and acquiring companies mutually will make the same analysis with different results. This is while they are viewing the deal from opposite sides. The two parties may decide on different values even if the methods are similar. This is because they utilize different assumptions and judgments or they have different needs.
Divestitures
Sell-offs are typically divestitures. But companies also acquire other sell-off types, like a carve-out or equity. They aim to make the purchase tax-free which may call for a spinoff.
The most widely recognized type of divestiture includes the offer of a division of the parent company to another company. The cycle is a type of withdrawal for the selling company but a way of expansion for the buying company.
Divestiture Trends
During the third merger wave in the 1960s, there was a small number of divestitures and selloffs. Firms were busy engaging in huge expansions. And using the acquisition of other firms to build up the acquiring corporation’s stock price.
This development went to a sudden end due to changes in the tax laws. Another reason was administrative measures, alongside the decline in the stock market.
There became a reconsideration of the acquisitions that were proven to be helpless combinations. A need increased by the recession from 1974 to 1975. Due to the weak economic demand, divisions were sold off by firms to earn funds and improve their cash flow.
Global competition also encouraged some 1960s firms to keep up through sell-offs of prior acquisitions that used to be weak in the world market.
This inversion of the obtaining pattern was noticeable as early as 1971. This is when divestitures hopped to 42% of total exchanges.
The pattern peaked in 1975, a time of monetary downturn, when the amount of divestitures established 54%, all transactions considered. They stayed somewhere in the range of 35% and 40% all through the 1980s.
But in the fifth merger wave, merger wave, the quantity of divestitures rose again. This happened as scaling back and refocusing became noticeable business techniques. At the point when the volume of overall deals debilitated toward the end of the wave, divestiture volume eased back. But it bounced back again during the 2000s, when the M&A action continued.
Divestiture in 1960s and mid 70s
Most divestitures are products of sell-offs of late acquisitions. The extreme time of the merger movement of the latter part of the 1960s. It was reflected in a pronounced peak at this time, followed by a peak in the divestiture bend in the mid 1970s. It was one factor that affected this volume is the stock market.
In a study by Linn and Rozeff, it was found that in years that the stock market was down, the volume of divestiture was way lower than expected given the previous merger rates. But when the market was performing well, so did divestitures.
This case is not limited to the USA. Europe and Asia also have a strong similarity among the variations in the divestiture volumes. A slight difference, however, is when the total divestitures in Europe and Asia increased.
It increased during the fifth merger wave’s second half that they did in the United States. All of them declined when the economy declined too in 2000-2001. However, it increased again in 2003. This is especially true for Europe.
The Probability of Divestiture of Prior Acquisitions
In a study by Kaplan and Weisbach, they investigated 271 large acquisitions between 1971 and 1982. They found that 43.9%, or 119, of these acquisitions, were divested by 1982 with an average of seven years. They also analyzed the patterns in the activities that became the cause of sell-offs.
According to the results, diversifying acquisitions are more likely to be divested. This is compared to those that are not. It also complements other evidence about the benefits of acquisition programs.
Involuntary Divestiture
Divestiture can be divided into voluntary or involuntary. An involuntary divestiture occurs when the firm accumulates a negative review.
They may require the company to divest itself of a certain portion. For instance, in June 1987, the Interstate Commerce Commission (ICC) decided that the merger of the Santa Fe and Southern Pacific railway systems might weaken competition.
There had been a merger between Santa Fe and Southern Pacific in 1983. This happened as they waited for an antitrust investigation and decision from the ICC. The ICC had antitrust jurisdiction for this type of merger.
After this, the ICC required the Santa Fe-Southern Pacific to send a divestiture plan within 90 days. This had very bad repercussions on the stock price of Santa Fe and made the company a target of a bid by the Henley Group.
© Image credits to Anni Roenkae
Corporate Restructuring Introduction
Now that we have finished our chapter for high-yield financing and the leveraged loan market, we can move on to corporate restructuring. Mergers and acquisitions are focused on corporate expansions almost all of the time. However, there are times when companies have to condense. And cut back their operations. It happens to a lot of businesses, even the best ones.
Usually, this happens because a branch or a part of the company is performing insufficiently. There are also instances when a specific division no longer qualifies for the company’s future plans.
Moreover, corporate restructuring can also be done to undo a previous unsuccessful merger or acquisition. It’s a way to get a not necessarily new, but better company structure.
It is true that financial adversity from a consolidation of high advantage and weak economic appeal often leads to a lot of sell-offs. However, there are also times when overall deal volume increases lead to a high volume of sell-offs.
You may also notice that the number of sell-off deals follows the spike and crash of the economy. This is very similar to how mergers and acquisitions follow the overall pattern of economic fluctuations. This happens in different countries in Asia, Europe, and more, not just in the United States.
What Will You Learn?
We will learn multiple classification of corporate restructuring. We will also look at the development of decision-making techniques and strategies that leads to the divestiture decision.
Companies also utilize the system used to evaluate acquisition targets. This is to find out whether it is still worth retaining a particular component of the firm. Typically, the divesting and the acquiring firms undergo an identical type of evaluation. This is as they look at the transactions from opposite sides.
Yes, the methods are similar. However, both parties may come up with a dissimilar valuation. This is because they use different inferences. Additionally, both parties may have contrasting needs.
We will also learn the shareholder wealth results of multiple types of corporate restructuring.
When the dismantled component deteriorates, and fails to generate a value to the enterprise that is proportionate with its market value, then corporate contraction may have positive stock price effects.
In cases like these, the corporation can pursue an administration of corporate restructuring. This is to build up the significance of shareholder investments.
Different Forms of Corporate Restructuring
As such, it is important to know that there are several different forms of corporate restructuring. There’s divestitures, which we will discuss in the next article, and equity carve-outs. There’s also spinoffs, split-offs, exchange offers, and split-ups.
Divestiture
This refers to the selling of a fraction of the firm to a foreign party. Usually, they pay the selling firm in cash or in marketable securities. There are also times when thy pay the selling firm in a combination of the two.
Equity carve-outs
Under divestiture is a variation called equity carve-out. It involves the selling of investment interest in an ancillary to outsiders. Now, this sale could or could not leave the parent company in control of the ancillary. In return, the new equity rewards the investors’ stake of ownership in a fraction of the dismantled selling corporation.
Here, a new legal body is born with a stockholder base. The stockholder base could be dissimilar to the parent company. A different management handles the divested company. It is regarded as an isolated firm.
Standard spin-offs
In this, they establish a new legal body. Similarly, they also circulate new shares. The only difference is that here, the shares are dispersed to stockholders on a pro rata principle.
In standard spin-offs, the investor base in the new organization is the equivalent of the old organization. This is an outcome of the corresponding distribution of shares.
Initially, the stockholders are the same. However, the spun-off firm will have its own management. It is regarded as a separate company.
One more key contrast between a spinoff and a divestiture is that the last includes a mixture of assets to the forerunner company. On the other hand, spinoffs usually do not provide the parent company a cash infusion.
Exchange Offer
Next, we have exchange offers or split-offs. This is where they issue new stakes in a subsidiary. The stakeholders in the forerunner company are also given the choice to either:
- Keep their shares
- Swap these stakes for an equity interest in the new subsidiary held by the public.
It will be noticed that this sort of exchange is a little bit similar to a spinoff. This is because new shares are issued that depicts an equity gain in a subsidiary. These shares are also removed from the forerunner company.
The difference between a split off and spinoff is that in split-offs, parent company shareholders have to part with their shares so they can get the newly issued shares.
Let’s take Pfizer, for instance. In 2013, this global company offered its shareholders an opportunity to exchange their shares for the shares of its spun-off animal health subsidiary, Zoetis.
The organization offered its investors $107.52 worth of Zoetis shares for each $100 worth of Pfizer shares. This $7.52 increase in Zoetis shares allows the shareholders to get an incentive to exchange.
It is inevitable for the parent company to lose the contribution to the profits of the separated entity. This means that the total stakes of outstanding of the forerunner company are also decreased. This may or may not offset the losses of profits in earnings per share.
Split-ups
Lastly, we have split-ups. This is where the entire firm is broken down into a string of spinoffs. As a result of this process, the parent company will cease to exist. This leaves only the newly formed companies.
In this sort of corporate restructuring, the investors of the organizations might be dissimilar. This is because stockholders exchanged their parts in the parent organization. They traded it for at least one of the units that spun off.
There are instances where corporations do a combination of more than one corporate restructuring strategies.
© Image credits to Miguel Á. Padriñán
Junk Bond Research & Growth of the Market
We are almost done with our discussion about the history of the junk bond market. In today’s article, we will focus on the role of junk bond research when it comes to the growth of the market in the fourth wave. Let’s get to it.
There were multiple studies and research on junk bonds. These studies indicate that these securities are not as risky as some may think. Investors, in particular, view junk bonds as a risky investment.
However, these junk bond research proves that they are not. In fact, they may even provide returns in excess of the risk they have.
Junk Bond Research
In 1958, W. Braddock Hickman published a study. This particular junk bond research concluded that the non-investment-grade bonds had higher returns than investment-grade bonds. This is true even after considering the default losses.
His study was set between the years of 1900 to 1943. The results of this particular junk bond research were later challenged by Fraine and Mills.
According to them, there were different factors that have affected the conclusion. The factors, including the interest rate variation, may have partisan the results of Hickman’s junk bond research.
To this day, Hickman’s pro-junk bond conclusions have been extensively mentioned. Especially in the line of the securities industries. On the other hand, the contradictions in the findings of Frain and Mills’ junk bond research hasn’t received as much attention.
Michael Milken used the findings on Hickman’s research to market high-yield bonds. And it worked very well for cautious institutional investors.
As you may remember from our previous article, we discussed that high-yield bonds were still difficult to sell until the late 1970s. This is even with Hickman’s junk bond research.
At the time, institutional investors were still reluctant. They didn’t want to add to their portfolio bonds that they treated immensely risky.
Altman and Namacher’s Junk Bond Research
However, another major research was published. This research suggested lending endorsement to the Hickman conclusions. Altman and Namacher’s junk bond research seemed to provide evidence that supports Hickman’s research.
In their study, Altman and Namacher showed proof that the delinquency rates of low-rated companies were lesser than what was believed. It demonstrated that the average delinquency rate for junk bonds was 2.1%.
This percentage was not considerably greater than the default rate on investment-grade bonds. The default rate on these types of securities was almost 0%.
Moreover, their junk bond research revealed that as the time of default approaches, the rating declines. According to their observation, 13 out of 130 were rated as investment-grade one year prior to default. That’s exactly 10%.
On the other hand, only 4 out of 130 received the same rating six months prior to default. That’s a measly 3%. It strongly implied that the bond appraisal can be utilized as a dependable sign of the possibility of default.
This popular study dominated the junk bond research field. It has always been one of the most compelling papers of study on the default risk of junk bonds.
The results of these studies strongly implied that the marketplace is inefficient. It also implied that the market produces a profit in the exuberance of the risk on these bonds.
Altman’s Default Measure
However, the results of their research were affected by Altman’s default measure. His default measure goes like this: the dollar value of bonds, divide it by the total dollar value of high-yield bonds in the market.
This default was heavily affected by the speedily development of the market. This growth was witnessed in the mid-1980s, as we discussed before. To some extent, the rapid growth masked the default rate.
Because of this, risky bonds might not manifest the risk until they have “aged.” And this only happens over the course of time Their study did not follow the bonds over their life. They did not study it excessively to see how their risk profile changed as the bonds aged.
Asquith, Mullins, and Wolff Research
On the other hand, there was a study by Asquith, Mullins, and Wolff. Their study examined the aging development of junk bonds.
They examined the junk bonds that were issued between ‘77 and ‘78 until 1986. By doing this study, they counterbalance the effect of the speedily growing junk bond market. These were the ones that affected the junk bond research of Altman and Namacher.
Asquith, Mullins, and Wolff’s study took notice of the role exchanges played in understating the true junk bond default rate. For instance, when junk bond issuers were in danger of defaulting, they would sometimes offer an exchange to bondholders. They will offer bondholders an exchange of new bonds. These new bonds might not pay interest right away. However, they might also offer a higher interest in the future.
Additionally, junk bond issuers may also offer exchanges that involve non-dividend-paying stocks. Or at least, not paying dividends at that specific time.
Oftentimes, bondholders are reluctant to accept exchanges like these. However, they do so as the alternative of default was less attractive.
Moreover, their study also considered the adverse impact that the call-in bonds had. There were lots of firms that extorted the deterioration in interest rates after the junk bonds were issued. These firms were the ones who issued junk bonds with comparatively greater interest rates.
Call Protection for Junk Bonds
A lot of junk bonds have call security for a finite duration. Now, during that same duration, the bonds may not be enforced. However, at the end of that duration, the bonds may be enforced. This is as a consequence of which the bondholders may be disadvantaged. They may be deprived at a rate of return that is far greater to other rates in the market.
According to Asquith and his co-researchers, around 23-43% of bonds issued between the years 1977 and 1982 were called by November 1st of 1988. The deterioration in interest rates that started in ‘82 caused these calls.
Moreover, their study described defaults to be any of the following:
- The issuer filed for bankruptcy
- The official proclamation of delinquency by the bond trustee
- The appointment of a Standard & Poor’s D rating
It is also considered a default of the original issue if the bonds were swapped for other bonds that eventually defaulted. This specific junk bond research showed that default rates were higher for aging issues. Many expected this outcome.
What’s Next?
We hope that this study about junk bond research has helped you understand its role in the growth of the market in the fourth wave. We’ll see you at the next one!
© Image credits to Anni Roenkae
Junk Bond Refinancing and Bridge Loans
In continuation of our discussion regarding the history of the junk bond market, we will talk about the junk bond refinancing and bridge loan. We will also dive into the disintegration of the junk bond market in the latter part of the 80s. Moreover, we will go through the LTV bankruptcy, the financing decline of 1989, and more.
Junk Bond Refinancing and Bridge Loans
All companies need initial capital when they do a cash acquisition. This is needed so they can pay the target company’s shareholders for their shares.
In times like these, companies may intend on utilizing high-yield bonds to bankroll the deal. However, there are instances when the seller might not want to replace its shares for the high-yield bonds that the buyer plans to issue.
So, how do they reach an arrangement? Well, the buyer can then enlist the services of its investment banker. The investment banker will then raise the short-term financing that the buyer requires.
Now, in times like these, the financing can come in the form of a bridge loan from the bank. In return, this loan can be “refinanced” at a later date. It can be refinanced through the issuance of high-yield bonds.
The Downturn of the Junk Bond Market in the 80s
Now that we have gone through how junk bond refinancing works, let’s discuss the collapse of the junk bond market in the late 80s. We all knew that the junk bond market had rapid growth in the mid-80s. However, the market would crash in the later years of that decade.
There were certain major events that caused this collapse. This includes the liquidation of the LTV Corporation. It also includes the bankruptcy of Integrated Resources. Additionally, there were also legal problems with regard to Michael Milken. More specifically, his investment bank, the Drexel Burnham Lambert.
We will deliberate more of this later on. First, let’s discuss the LTV Bankruptcy.
LTV Bankruptcy
In the year 1986, the flexibility of the junk bond market had doubts cast on it. This was the year when the LTV Corporation evaded the high-yield bonds that it had circulated in the years prior.
At the time, the company’s liquidation was the largest company bankruptcy on record. They represented 56% of the total liability defaulting in 1986.
According to Ma, Rao, and Peterson, this circumstance caused a brief six-month modification in the market’s contingency for default. This was as echoed by the risk-premium return on junk bonds and junk bond refinancing.
The market rebounded afterward, and this effect was transitory. According to the study by Ma, Rao, and Peterson, the junk bond market was resilient at the time. It was more than capable of withstanding the shock of a major default.
However, things weren’t over yet. There was more to come.
Financing Failures of 1989
If the junk bond market was resilient enough to withstand the bankruptcy of the LTV, it would later be put to another test.
The junk bond market was shocked once again, This was caused by the financing failures of 1989. The lack of success of other junk bond issuers was precisely related to exaggerated and overleveraged deals.
For instance, offerings by issuers swelled the market with increased supplies. Campeau Corporation was one of the largest issuers at the time.
In the first few months of 89, there was around $20 billion valuations of junk bonds presented. The same period the year before, there was only $9.2 billion offerings in junk bond refinancing.
Why did this happen? Well, issuers had to offer larger and larger rates to attract investors. This was the only way to get investors to buy risky securities.
The junk bond offering by Campeau Corporation was poorly received in 1988. Despite the fact that the offer provided 16% voucher premiums on 12-year bonds. They also offered a 17.75% voucher on 16-year bonds. This was managed by the First Boston Corporation. It was an investment bank.
However, in October that same year, the investment bank had to withdraw a $1.15 billion junk-bond offering. This was because investors demanded that the debt-laden concern’s guarantee failed to appear.
The bank’s response was to offer a $750 million that brought higher returns. Despite this large sum of money, however, the demand was still weak.
Now, more than ever, it was challenging to bid new high return bonds at the time. This was because of the absense of a capable, respectable secondary market.
More Contributing Factors
That was another assisting factor in the unraveling of the financing for the acquisition of the United Airlines in October of 1989. The market continued to refuse to respond even when reputable issuers presented 15% interest rates for an expected $475 million release in 1989. This event would later be famous as the “burning mattress”
The Default of Integrated Resources
In June of 1989, Integrated Resources defaulted. The company was built on junk bond refinancing. It was known as the most distinguished consumer of junk bonds amongst all insurance companies. In early 1990, the company submitted a filing for bankruptcy.
This event has sent shockwaves through a lot of institutional investors who had helped the junk bond market grow.
The Bankruptcy of Drexel Burnham Lambert
Now, let’s talk about the bankruptcy of the famous Drexel Burnham Lambert. In 1986, the investment bank reported an annual profit of $1 billion pre-tax.
However, in late 1988, no more than 2 years later, the bank pleaded guilty to criminal charges. They have compensated more than $40 million in levy.
A year later, the investment bank showed a loss of $40 million. They filed for bankruptcy because there was a liquidity crisis. This crisis was caused by the firm’s failure to pay short-term credit. They were also unable to pay for commercial paper funding that was overdue.
Usually, securities firms rely on short-term financing to bankroll their securities holdings. And Drexel Burnham Lambert was one of the major issuers. They were the primary issuer of more than $700 million in commercial paper.
In 1989, the commercial paper market declined. This has compelled Drexel to disburse more than $575 million. This money could not be refinanced through the issues of new monetary paper.
Later on, the commercial paper market closed. And because of this, Drexel’s liquidity was effectively wiped out.
Drexel wasn’t able to seek long-term junk bond refinancing. This was due to the fact that the junk bond market collapsed prior to the bank’s bankruptcy. Their only course of action was to file for Chapter 11 protection.
Hopefully this piece has helped you learn about junk bond refinancing and bridge loans. As well as the collapse and fall of the junk bond market. In the next article, we will discuss the post of junk bond analysis in the growth of the market in the fourth wave.
© Image credits to Julie Aagaard