Corporate actions

Corporate structures are fluid and can change quickly. If you’ve ever heard of a large company buying another company, or two companies becoming one, then you’ve heard of corporate actions. In this section, we’ll discuss four unique changes to corporate structures, typically referred to as corporate actions: spinoffs, mergers, consolidations, and acquisitions.

Large companies usually have subsidiaries (also referred to as “child companies”), which are separate businesses offering varying products and services. For example, Johnson & Johnson owns several subsidiaries, like Band-Aid, Motrin, Neutrogena, and Tylenol. Large companies that own numerous subsidiaries are sometimes referred to as conglomerates.

Every now and then, subsidiaries and their parent companies have different visions for their business and are better suited going forward separately. In 2015, eBay spun off PayPal as a stand-alone business. Before the spinoff, there were tensions between the two successful companies. PayPal had a more laid-back, free-thinking culture, whereas eBay was more traditionally corporate. Eventually, PayPal had problems hiring and retaining the right executives with eBay’s more-traditional approach to managing PayPal.

A corporate spinoff allows companies to focus more on their core businesses. Prior to the spinoff, it was argued that eBay was hindering PayPal’s growth. If PayPal wanted to pursue a new business opportunity or focus on something new, it had to gain eBay’s support to do so. Eventually, shareholders urged and convinced eBay to spin off PayPal. In particular, well-known investor and large shareholder Carl Icahn was credited with pushing forward the idea.

This shows the power of shareholders and the importance of their votes. Because eBay was a publicly traded company with stock outstanding, it had to seriously consider its shareholder’s demands. Privately held companies have this advantage over publicly held companies. If there are no shareholders to answer to, then the company can do whatever it wants.

Spinoffs vary in terms of how they work. In eBay’s spinoff of PayPal, every eBay shareholder received one share of PayPal once the spinoff was complete. However, it won’t always work that way. The details aren’t important; you’ll only need to know that spinoffs are unique and have different results.

Corporate actions can work in the exact opposite manner as well. Instead of corporations splitting into separate entities, two or more can come together as one. This is where we’ll discuss mergers and consolidations. While they are similar, there are some unique differences.

Mergers occur when two businesses form as one, with one business continuing and the other shutting down. For example, Disney merged with 20th Century Fox in early 2019. Disney (the larger company of the two) continued its operations as Disney, while 20th Century Fox shut down as a separate entity and became a part of Disney. Essentially, a merger occurs when Company 1 combines with Company 2, and they proceed forward together as Company 1.

In 1999, the two natural resource titans Exxon and Mobil consolidated as one company. Although many media sources referred to the move as a merger, it was technically a consolidation. When the two companies came together, they formed a brand new company - Exxon Mobil as we know it today. When Company 1 combines with Company 2 to create a new entity (Company 3), it’s a consolidation.

Two companies can become one without merging or consolidating. You won’t need to know the details, but acquisitions occur when a larger company buys out a smaller company. In late 2019, Alphabet (Google’s parent company) purchased Fitbit for just over $2 billion. Acquisitions occur when the larger company outright purchases the company (if it’s private) or 51% or more of its stock if it’s publicly traded.

In summary, corporate structures evolve over time in order to pursue success. Many times. these changes are beneficial. However, it isn’t always a good move; for example, AOL and Time Warner’s merger in early 2000 was a disaster. Regardless of the outcome, it’s important for you to understand these corporate actions for the exam.