Selecting the key to unlock hidden value

Abstract

Firms can choose to restructure by using a carve-out, sell-off, spin-off, or exchange, or by issuing tracking stock. The purpose of this study is to determine how firms choose among these methods when restructuring to "unlock value." Using a sample of Compustat firms during the period from 1990-1999, I estimate the joint likelihood that a firm will restructure and the likelihood it will raise external capital. I find that firms are more likely to either restructure only or restructure and raise capital as the percentage of unrelated segments increases, as the abnormal industry sales decrease, as firm size increases, and as the firm's current ratio decreases. In addition, the likelihood of restructuring and raising capital increases as the firms leverage ratio increases. The probability that the firm will only restructures is negatively related to the firm's growth rate and return on assets, and positively related to the number of segments and the firm's free cash flows. Finally, I find evidence that the restructuring and need for capital decisions should be considered simultaneously. Conditional on the estimated probabilities, I estimate logit equations to determine how restructuring choices are made. I find that the likelihood of choosing a spin-off or issuing tracking stock rather than an exchange increases when the segment is unrelated and as the probability of only restructuring decreases. This result is consistent with firms having the capacity to use means other than restructuring to raise cash. As the probability of restructuring only decreases, exchanges, tracking stock issues, or sell-offs are more likely to occur than carve-outs. In addition, segments that experience growth in sales are more likely to be carved-out than exchanged or sold-off. Firms are more likely choose a sell-off rather than issue tracking stock, or exchange or carve-out a segment when leverage ratios are increasing, the firm is growing, and the probability of restructuring only decreases. This finding is consistent with the notion that firms look to sell-off assets as a way to raise cash to pay off existing debt or because additional debt issues are too costly.