Financial management : Question 3
What advantages are there for a group in spinning off its divisions into subsidiaries? Can this be considered to be a defence against a takeover?

Firstly, if a division is spun off into a subsidiary, its real earnings, which are otherwise drowned in the sea of the parent company’s results become clearly visible. This makes it easier to get the managers of the division to take more responsibility and to involve them financially in the company, through a share in the capital, stock options, etc., which sooner or later will be bought back by the parent company, unless the spun off division goes public. The key advantages here are management control and staff motivation.

Secondly, the capital of these new subsidiaries can be opened up to third parties. Accordingly, it is a means of financing, whether third party involvement is through a capital increase (financing of subsidiary) or through the sale of shares (financing of parent company). Its also a way for forge capital-related links (shareholdings, mergers) with a group that may only be interested in the activities of the new subsidiary, but not of the parent company.

Spinning off a division into a subsidiary is not in itself an anti-takeover measure, but opening up the capital of the new subsidiary could be if the subsidiary is large in comparison to the group, and if the third party has negotiated the right to buy the parent company’s (majority) share in the subsidiary in the event of a change in control of the parent company. This sort of mechanism should be set up in advance, and not just before the launch of a takeover bid.

For more information, see chapter 45 of the Vernimmen.