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Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 28 Divestitures
Solutions
1. The main issue with respect to the dilution or accretion question is whether the return earned on
the divested unit was greater than or less than that earned on the use of the funds received for the
divested unit. If the company uses the proceeds to pay off debt and the return on the divested unit
was greater than the cost of debt being repaid, then there will be dilution; if the return was less
than the cost of debt, there will be accretion. If the company uses the proceeds to buy back shares
2. If the unit considered for divestiture is worth more to the acquirer than to the seller, then it can
command a premium from the seller’s viewpoint and should be sold. A division in its early stage of
3. The five complicating factors are (1) the possible effects on the synergies and services of the
remaining businesses; (2) disentanglement costs; (3) stranded corporate costs; (4) legal, contractual,
and regulatory barriers; and (5) possible changes in the pricing and liquidity of the assets along with
changes in the market that make a good deal become less attractive. For (1), the lost synergies could
4. The buyer should not be influenced by the potential detriments to the seller from divesting the
5. There can be many other considerations. One factor may be the way the divestiture affects the cost
6. There are two private-transaction approaches: (1) a trade sale to a strategic or a financial investor
and (2) a joint venture to other industry players or related firms. Public transactions include (1) an
IPO, (2) a carve-out to new shareholders, (3) a spin-off by distributing shares to existing
shareholders, (4) a split-off by offering shares to existing shareholders, and (5) issuance of tracking
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7. If there is not a trade-sale buyer willing to pay a sufficient premium, then the parent company
8. Carve-outs are often more beneficial for subsidiaries with higher growth rates. The carve-out
