Unlocking Value: Equity Carve Outs as Strategic Real Options

Perotti, Enrico; Rossetto, Silvia

doi:10.2139/ssrn.590769

Cited by 11 publications

(14 citation statements)

References 3 publications

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“…Traditional real options logic also suggests that firms may flexibly structure their divestments in order to proactively deal with uncertainty much as they structure their investments flexibly under conditions of high uncertainty (Dixit and Pindyck, ; Kogut, ). As has been argued earlier, high uncertainty about the prospects of the business unit's industry may make costly‐to‐reverse actions (such as sell‐offs) unattractive (Perotti and Rossetto, ). Nevertheless, by choosing staged divestments (spin‐offs/carve‐outs), as opposed to complete divestments (sell‐offs), parent firms can maintain their access to critical information in the subsidiary industries and can adjust their divestment strategies as new information arrives.…”

Section: Theory Development and Hypothesesmentioning

confidence: 99%

“…Viewed this way, the choice of a spin‐off/carve‐out, as opposed to complete divestment, creates future strategic options for a firm. Such a staged divestment simultaneously gives a put option to sell and a call option to re‐acquire the business unit (Perotti and Rossetto, ). The value of such options increases with increasing uncertainty in the business unit's environment.…”

Section: Theory Development and Hypothesesmentioning

confidence: 99%

“…Of these modes, spin‐offs and equity carve‐outs are staged divestments and are often the first stage of a further spin‐off/carve‐out, complete divestment or sell‐off, or bringing back the unit into the parent company (Zingales, ). In that sense, these modes of staged divestment may also exhibit real option properties (Perotti and Rossetto, ). This paper investigates the relationship between uncertainty in a business unit's environment and divestment mode choices (i.e., non‐divestment, staged divestment, and complete divestment).…”

Section: Introductionmentioning

confidence: 99%

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Real options in divestment alternatives

Damaraju

Barney

Makhija

2014

Strategic Management Journal

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This paper examines the implications of real options theory for both the decision to divest a business unit and the mode of divestment. It is shown that the decision to divest a business unit and the decision to engage in staged modes of divestment are both sensitive to uncertainty, consistent with a real options logic. However, in the face of uncertainty, the results suggest that staged forms of governance create real options that are of lesser value as compared to simply not divesting a business unit and also as compared to completely divesting a business unit. Thus, this study shows that firms have real options of varied value to choose from in the context of divestments. Copyright © 2014 John Wiley & Sons, Ltd.

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Section: Theory Development and Hypothesesmentioning

confidence: 99%

Section: Theory Development and Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Real options in divestment alternatives

Damaraju

Barney

Makhija

2014

Strategic Management Journal

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“…As noted above, the listing of subsidiary's shares reduces informational asymmetries and expose the subsidiary to the market for corporate control. Perotti and Rossetto (2007) model equity carveouts as a way for the parent to obtain information from the market on the value of the subsidiary as an independent entity. While costly, the listing generates information about the optimal allocation of ownership of the subsidiary.…”

Section: Follow-on Eventsmentioning

confidence: 99%

Corporate Restructuring

DeVita¹,

Elwell²

2013

Encyclopedia of Corporate Social Responsibility

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We survey the empirical literature on corporate financial restructuring, including breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). For each transaction type, we survey techniques, deal financing, transaction volume, valuation effects and potential sources of restructuring gains. Many breakup transactions appear to be a response to excessive conglomeration and attempt to reverse a potentially costly diversification discount. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the 1990s on average create value similar to LBOs of the 1980s. Recent developments include consortiums of private equity funds (club deals), exits through secondary buyouts (sale to another LBO fund), and evidence of persistence in fund returns. LBO deal financing has evolved toward lower leverage ratios. In Europe, recent deals are financed with less leveraged loans and mezzanine debt and more high-yield debt than before. Future research challenges include integrating analyses across transaction types and financing mixes, and producing unbiased estimates of the expected return from buyout investments in the presence of limited data on portfolio companies that do not return to public status.

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“…, 2008), long‐term stock performance (Vijh, 1999) and operating performance (Boone et al. , 2003; Powers, 2003), and motivations in terms of use of proceeds (Allen and McConnell, 1998), restructuring (Schipper and Smith, 1986; Vijh, 2002; Powers, 2003) and information production (Perotti and Rossetto, 2007).…”

mentioning

confidence: 99%

The impacts of parent’s listing status on subsidiary’s financial constraint and cost of equity capital: the case of equity carve‐outs

Tam

2012

Accounting & Finance

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We find that listed parents' carve-outs have investment-cash-flow sensitivities 70 per cent lower than unlisted parents' carve-outs, on average. Such a finding is stronger when we consider only equity carve-outs in technological industries. The finding suggests that listed parents are more capable of alleviating the financial constraint of their carved-out units than private parents. Our further analysis shows that listed parents' carve-outs also have a lower cost of equity than their counterparts, but such difference cannot be explained by corporate transparency, as implied by analyst coverage and analysts' forecast dispersion. Therefore, we argue that the benefits from affiliation with a listed parent to the carve-out come mainly from the parent's financial support rather than an increase in corporate transparency.

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Unlocking Value: Equity Carve Outs as Strategic Real Options

Cited by 11 publications

References 3 publications

Real options in divestment alternatives

Real options in divestment alternatives

Corporate Restructuring

The impacts of parent’s listing status on subsidiary’s financial constraint and cost of equity capital: the case of equity carve‐outs

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