Assessing Potential Value from Divestitures  625 ­pharmaceutical company, it needs to apply for a transfer of the marketing authorization for each individual product in each specific market. This is a time-consuming process that requires additional expenses. Asset transactions can be especially complex, because they require extensive documentation and contracts with respect to all the different categories of assets involved. Contractual issues often come as unpleasant surprises that typically sur- face after companies have started the divestiture process. Procurement con- tracts, long-term contracts with customers, and loan agreements, for example, often require the creation of transitional service agreements between buyer and seller to guarantee continuity of the business unit. Or they may include change-of-ownership clauses activated upon divestiture that render the exist- ing contract or agreement invalid when ownership in the business transfers. Pricing and Liquidity As discussed in Chapter 7, market valuation levels are generally in line with intrinsic value potential in the long term but can deviate in the short term. A near-term divestiture would seem to be a good idea if the market would price a business above management’s estimate of its intrinsic value. The re- verse holds as well: Siemens, for example, abandoned the initial public offer- ing (IPO) of its lighting business OSRAM several times due to adverse market conditions. Although external market factors may lower potential proceeds from a divestiture, management should balance this against the (hidden) costs of con- tinuing with the status quo. Alternatively, management could look into trans- action types that do not generate cash proceeds and thereby do not lock in an exit price for the company’s shareholders. For example, as the credit crunch unfolded in 2008, Cadbury decided against a planned trade sale (in cash) of its American beverages business. Instead, it opted for a noncash demerger of the corporate group into two listed entities. This left Cadbury shareholders with the option to hold the shares of the American business and sell at some later stage, when prices might be higher. Even when market valuation levels seem to be free of distortions and a seller could reasonably expect a value-creating offer, a lack of competing buyers may make the seller reluctant to pursue the transaction. An academic study concluded that companies are less likely to pursue divestitures of par- ticular assets when the markets for these assets are less liquid in terms of the volume of transactions.16 The more liquid a market for particular assets, the better the price setting is expected to be. 16 F. Schlingemann, R. Stulz, and R. Walkling, “Divestitures and the Liquidity of the Market for Corpo- rate Assets,” Journal of Financial Economics 64 (2002): 117–144. 626  Divestitures Deciding on Transaction Type Once a corporation has identified businesses for divestiture, it must decide what transaction structure to use. Its choices will depend on the availability of strategic or financial buyers, the need to raise cash, the benefits of retaining some level of control during the first phase of the separation, and fiscal impli- cations for the company and/or its shareholders. The remainder of this chapter provides a brief overview of different transaction types and discusses the trade-offs among alternative forms of public-ownership transactions, their impact on long-term performance, and the dynamics of ownership structures over time. Executives can choose from many types of structures for private and public transactions: Private transactions • Trade sale: sale of part or all of a business to a strategic or financial inves- tor • Joint venture: a combination of part or all of a business with other indus- try players, other companies in the value chain, or venture capitalists Public transactions • Initial public offering (IPO): sale of all shares of a subsidiary to new share- holders in the stock market • Carve-out (IPO of a minority stake): sale of part of the shares in a subsid- iary to new shareholders in the stock market • Spin-off (or demerger): distribution of all shares in a subsidiary to existing shareholders of the parent company • Split-off: an offer to existing shareholders of the parent company to ex- change their shares in the parent company for shares in the subsidiary • Tracking stock: a separate class of parent shares that is distributed to ex- isting shareholders of the parent company through a spin-off or sold to new shareholders through a carve-out Private Transactions Private transactions typically create the most value if other parties are judged to be better owners of the business. Private transactions allow the company to sell the business unit at a premium and capture value immediately. In most situations, the counterparties will be strategic buyers (that is, other industry players), but potential financial buyers also should be considered. However, an outright sale may result in taxable gains that will put this alternative at a disadvantage. In the United States, for example, a company