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

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ALTERNATIVE METHODS OF DISPOSITION

The decision to divest is often easier than the decisions around how to divest. Divestiture tactics affect taxes, accounting, and proceeds raised as well as the fundamental degree of intrinsic value creation.

Private and Public Sale

Private sales provide quick execution but proceeds are not necessarily in cash and tax leakage can be large. Economics can be improved via competitive bid dynamics and tax efficient structures (Section §338h10 acquirer tax basis step-up; §355e Morris Trust). In practice, a dual-track process is often undertaken with one of the following methods of public disposition introduced into the restructuring plan.

In an IPO, a firm issues shares of a subsidiary to the public in exchange for cash. If a parent company continues to hold a stake in the subsidiary final separation may be achieved through secondary common stock offerings, block trades, selling down over time, or exchangeable securities.

IPOs are frequently undertaken with the goal of unlocking trapped value, while raising proceeds for the parent. Attractive businesses of sufficient size are frequently sold in the public markets at a premium to precedent transactions and trading multiples.

IPOs are often the method of choice for divesting growth businesses during hot markets when embedded tax gains are relatively insignificant and there is a strong desire to raise proceeds. Over the long term, the subsidiary in an IPO has generally outperformed the parent, indicating ...

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