Sell-offs: A sell-off. also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn’t fit into the parent company’s core strategy The market may be undervaluing the combined business due to a lack of synergy between and subsidiary. As a result, management and the board decide that the subsidiary is beter different ownership. Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to payoff debt. In the late 1980s and early 1990s, corporate raiders would use dept to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the dept. The raiders’ method certainly makes sense if the sum of the parts is greater than the whole. When it isn’t, deals are unsuccessful.
Equity Carve-outs: More and more companies are using equity carve-outs to boost shareholder’s value. A parent firm makes a subsidiary public through an Initial Public Offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent’s shareholder value.
The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm’s board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely to be strong. Sometimes companies carve-out a subsidiary not because its doing well, but because it is a burden. Such an intention won’t lead to a successful result, especially if a carved-out subsidiary is too loaded with debt or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits. Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties.
Spinoffs: A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity
with a distinct management and board. Like carve-outs, spinoffs are usually about separating a health operation. In most cases, spinoffs unlock hidden shareholder’s value. For the parent company, it sharpens management focus. For the spinoff company, management doesnt have to compete for the parent’s attention and capital. Once they are set free, managers can explore new opportunities.
Investors, however should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spinoff shares are issued to parent company shareholders some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation.
Tracking Stock: A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of the company. The stock allows the different segments of the company to be valued differently by investors. Let’s say a slow-growth company trading at a low Price-Earnings ratio (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growing business for shareholders ? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing administrative support functions, headquarters and so on. Finally and most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions.
Still, shareholders need to remember that tracking stocks are class B, meaning they don’t grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or quarter of a vote. In rare cases, holders of tracking stock have no vote at all.
Characteristics of Corporate Reformation
1. Improving balance sheet of a firm by selling unprofitable division from its core business.
2. Reducing assets by selling of unprofitable or useless assets.
3. Modifying the corporate management.
4. Sale of underutilised assets, such as patents or brands.
5. Outsourcing operations such as payroll and technical support to a more efficient 3rd party
6. Shifting business operations such as manufacturing to lower-cost locations.
7. Reorganising basic functions such as sales, marketing and distribution.
8. A major public relations campaign to reposition the firm with consumer.
9. Renegotiating labour contracts to reduce overhead.
10. Refinancing of corporate debt to reduce interest payments.
0.14. Explain the significance of evaluations and control. Describe the role of key players involved in evaluations and control process.
Ans. Strategy Evaluations and Control Process
Overview: Evaluation and control entail monitoring the organisation’s performance to ensure that the chosen strategy achieves the desired objectives. The company evaluates and appraises its mission goals, objectives, strategies and policies in light of dynamic and ever-changing environment.Thus, the strategic management process goes full circle as a continuous and repetitive cycle of vision, planning, implementing and evaluating.
Evaluation and control are essential functions for validation and monitor the success or failure of management’s strategy. If results are below expectations, the organisation has the opportunity to reassess its direction and if necessary, alter the strategic plan.
Significance of Evaluation and Control: Why does actual performance match the performance desired in the strategic objectives? Was the strategic plan severely flawed in its formulation ? Did management’s implementation of the plan fall short? Were there uncontrollable factors external to the organisation that prevented achievement of the plan ? These questions suggest the importance of evaluation and control and need to understand how the plan can go wrong?
The worth of strategic evaluation also lies in its ability to coordinate the tasks performed by individual managers, division, through the control of performance. In the absence of this, individual managers may pursue goals, which are inconsistent with the overall objectives. There in need for
back, appraisal and reward, check on the validity of strategic choice, congruence between decision and intended strategy and creating inputs for new strategic planning.
Strategic evaluation helps to keep a check on the validity of strategic choice. An ongoing process of evaluation would, in fact, provide feedback on the continued relevance of the strategic choice made during the formulation phase. This is due to the efficacy of strategic evaluation to determine the effectiveness of strategy.
Role of Key Players in Evaluation and Control
1. The board of directors enacts the formal role of reviewing and screening executive decisions in the light of their environmental, business and organisational implications.
2. Chief executives are ultimately responsible for all the administrative aspects of strategic evaluation and control.
3. The SBU or profits centers’ heads may be involved in performance evaluation at their levels
and may facilitate evaluation by corporate-level executives.
4. Financial controllers, company secretaries and external and internal auditors form the
group of persons who are primarily responsible for operational control based on financial
analysis, budgeting and reporting.
5. Audit and executive committees may be charged with the responsibility of continuous
screening or performance.
- The corporate planning staff or department may also involve in strategic evaluation. Obstacles in Evaluation
Obstacles in Evaluation and Control
1. Dramatic increase in the environment’s complexity.
2. Increasing difficulty of predicting the future with accuracy.
3. Rapid rate of obsolescence of even the best plans.
4. Decreasing time span for which planning can be done with any degree of certainty
5. Tendency to rely on short-term assessment.
6. Increasing number of variables.
7. Relying on efficiency versus effectiveness.
A fundamental problem facing manager today is how to effectively control employees in light of modern organisational demands for greater flexibility, innovation, creativity and initiative from employees. How can managers today ensure that empowered employees acting in an entrepreneurial manner do not put the well being of the business at risk?
Requirements for Effective Control
1. Control should involve only the minimum amount of information. Too much information tends to clutter up the control system and creates confusion.
2. Control should monitor only managerial activities and results even if the evaluation is difficult to perform.
3. Long-term and short-term control should be used so that a balanced approach for evaluation can be adopted.
4. Control should aim at pinpointing exceptions. The 80:20 principle, where 20 per cent of the activities result in 80 per cent of achievement, needs to be emphasized.
5. Rewards for meeting or exceeding standard should be emphasized so that, manager are motivated to perform. Unnecessary emphasis on penalties tends to pressurise the managers to rely on efficiency rather than effectiveness.
0.15. Explain the process of strategy evaluation.
Ans. Strategy Evaluation Process: Strategy evaluation is necessary for all size types of expectations and assumptions values and stimulate creativity in generating choices and formulating, standards of evaluation .Evaluation process should be performed on continuous basis rate and creativity in generating choices and formulating, standards of periods to time. Continuous evaluation sets benchmarks of progress in monitoring the stagegious some
strategies take years to implement, consequently, associated results may not become apparent for years. Successful strategists combine patience with a willingness to take corrective actions Prompy when necessary. There always comes a time when corrective actions are needed in an organization.
There are four steps in the evaluation process:
1. Setting control standards.
2. Measuring performance.
3. Analysing deviations.
4. Taking corrective action.
1. Setting Control Standards
In setting the control standards, a company must identify the targets, determine the tolerance around those targets and specify the timing of the specific standards. In setting the targets, the company must deal with the issue of the exact behaviours relevant measures it is attempting to control. The measures of the company outcomes must be tied directly to the goal defined in the first step of determining what to control. Otherwise the control system may reinforce behaviour that makes individuals or parts of the organisation look on the control system’s measure to the determent of the organisation’s actual objectives.
For example, if the objective is to increase sales by 10 per cent for the year, the standard should be set in terms of net sales after customer returns, canceled orders and provisions for less worthy customers. A company does not benefits if items are shipped to customers who cannot pay for them. but a salesperson could look good temporarily on the standard of increased sales if the control system was not measuring net sales.
Setting the timing associated with the standards is a problem for any companies. It is not unusual for short-term objectives to be met at the expense of long-term objectives. For example, sales incentives and special advertising campaigns something artificially boost sales in the current quarter at the expense of future sales.
2. Measuring Performance
(a) Standard of performance act as the benchmark against which the actual performance is to be compared.
(b) Understand how the measurement of performance can take place,
(c) The information system is the key element in any measurement exercise.
(d)Operationally,measuring is done through the accounting, reporting and communication systems.
(e) Important to look at the difficulties, timing and measuring periodicity
Limitations in Measurement of Performance
(a)Timing of Measurement: Delay in measurement can other hand, measuring before time cannot serve the purpose si point in a task schedule.
(b) Periodicity in Measurement: It deals with how ‘often to measure’. Should it be done in shorter duration , possible on monthly or a weakly basis?
3. Analysing Deviations
At this step, company needs to ask if the deviation is due to interna rol of the company. This is a step in which there is a substantia
and operation control. In operation control, concern is focused needs to be changed. In strategic control company also asks if the company. In this step we analyse and compare the actual performance with standard of budgeting performance. Following are the basis of analysis
(a) The actual performance matches the budgeted performance = zero deviation
[b] The actual performance deviates positively over the budgeted nerformance=positive deviation
(c) The actual performance deviates negatively from the budgeted performance = negative deviation.
The first situation is ideal but not realistic. In practice, the actual performance rarely man the budgeted performance. Here, the strategists would have to specify a range of tolerance amies tal can be accepted and the variance is considered as not significant.
The second situation is welcomed, as it is an indication of superior performance. But exceeding the target continually should be considered as unusual and check needs to be made to test the validity of standards and the efficiency of the measurement system.
The third type of situation is alarming as it indicates a shortfall in achievement. The strategists need to pinpoint the areas where performance is below standard and go into the causes of deviation. Corrective actions are taken on the basis of the analysis of the causes of deviation.
After noting the deviations, it is now time to find the causes of deviations. The following questions can be helpful in determining the causes:
- Internal or external.
(ii) Random or expected.
(iii) Deviation temporary or permanent.
(iv) Are the strategies still valid ?
(V) The capacity to respond to the change needed.
(vi) Analysis of deviations leads to plan for corrective action.
4. Taking Corrective Action
Taking corrective action may be easier said than done. For internal changes, strength of conviction is needed. A company may need to commit some slack resources in other areas to correct ne situation. Alternatively, company may need to abandon some capital resources that no longer needed due to quality deficiencies, process deficiencies, or excessive cost. Such capital facilitates may serve as an exit barrier, however and executives may be reluctant to admit that the facilities are no longer needed and should be abandoned.
Deciding on internal changes and taking corrective action may involve changes in objectives, Largets, tolerance, strategies or implementation plans. Such changes obviously cause a re-examination Why the original plans were formulated and implemented the way they were. For external changes,
care is needed in taking corrective action. If compa to itself through lobbying, advertising, or other puose the risk of such efforts backfiring. There are proper role of organisation in influencing events externa aspects to be considered for both internal and external changes while taking corrective actions:
(a) Checking of performance requires going into details or organizational structure and systems as well as,behavioral implementation. Performance can be affected adversely due to a number of factors such as distortions in resource allocation, inappropriateness of structure and system and wrong leadership and motivational styles. It is a significant part of the day-to-day activities of managers.
(b) Checking of standards is less frequent but has to be done as soon as there is nothing significantly wrong with performance. A standards check may result in a lowering of standards if it is concluded that organisational capabilities do not match the performance requirements or may also lead to an elevation of standards of the condition have improved to allow better performance.
(C) A more radical and infrequent corrective action is to reformulate strategies, plans and objectives. Strategies, rather than operational control will lead to the conclusion whether strategies need reformulation, plans need to be remodelled, or objectives need to be redefined. Reformulation of strategy will take us back to the process of strategic management where a fresh strategic choice has to be made.