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Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

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SOURCES OF VALUE: MOTIVES FOR DIVESTITURE

Beyond the criterion of strategic fit, many factors drive the decision to classify a business as noncore and search out divestiture alternatives. Though a portion of the value accruing to shareholders can represent a wealth transfer from bondholders due to lost collateral—parent firm credit rating downgrades are evident—these businesses are usually worth more under an alternative ownership structure.5 The primary rationale for most restructuring is the creation of value through improved market transparency, management incentives and accountability, and resource allocation.6

Transparency

More frequent, granular, and comprehensive disclosure of strategies, tactics, and operating and financial performance aid the capital markets in evaluating a business and its worth. Higher market multiples (capitalization rates) result in the face of better earnings quality (cash flow certainty). Yet, competitive concerns, accounting difficulties, and administrative burden frequently inhibit better segment reporting in business units, making it more difficult to achieve this benefit without full separation.

Incentives and Accountability

Longer-term operating improvements have been demonstrated in the research on divestitures, supporting views of increased managerial efficiency due to better focus, incentives, and resource allocation. Improved transparency and line of sight (shorter distance) between management actions and results and the availability of ...

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