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. Here, we’ll look at four common corporate actions that change corporate structure: spinoffs, mergers, consolidations, and acquisitions.

Large companies often have subsidiaries (also called “child companies”). A subsidiary is a separate business owned by a larger company, and it may offer different products or services than the parent company. For example, Johnson & Johnson owns several subsidiaries, like Band-Aid, Motrin, Neutrogena, and Tylenol. Large companies that own many subsidiaries are sometimes called conglomerates.

Sometimes a subsidiary and its parent company develop different goals or operating styles and may function better as separate businesses. 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, while eBay was more traditionally corporate. Over time, PayPal had problems hiring and retaining the right executives under eBay’s more traditional approach to managing PayPal.

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

This example highlights the power of shareholders and the importance of shareholder votes. Because eBay was a publicly traded company with stock outstanding, it had to take shareholder demands seriously. Privately held companies don’t face the same pressure. If there are no shareholders to answer to, the company has more freedom to make decisions without outside approval.

Spinoffs can be structured in different ways. In eBay’s spinoff of PayPal, every eBay shareholder received one share of PayPal once the spinoff was complete. However, spinoffs don’t always work that way. The key point is that spinoffs can be set up differently and can lead to different outcomes.

Corporate actions can also work in the opposite direction. Instead of a corporation splitting into separate entities, two or more companies can combine into one. That brings us to mergers and consolidations. They’re similar ideas, but the end result is different.

Mergers occur when two businesses combine into one, with one business continuing and the other shutting down as a separate entity. For example, Disney merged with 20th Century Fox in early 2019. Disney (the larger company) continued operating as Disney, while 20th Century Fox stopped existing as a separate company and became part of Disney. In other words, a merger is like:

• Company 1 combines with Company 2
• The combined company continues 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. A consolidation is like:

• Company 1 combines with Company 2
• The combined company becomes a new entity (Company 3)

Two companies can also become one without a merger or consolidation. You won’t need 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 buys 51% or more of its stock (if it’s publicly traded).

In summary, corporate structures evolve over time as companies pursue success. Many times, these changes are beneficial. However, they aren’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 to understand these corporate actions for the exam.