Spin-Off and M&A Combination

M&A Weekly Watch

Verizon’s announcement that it will acquire AOL for $4.4 billion is the big M&A news of the week. Many view AOL as a dinosaur internet provider, however, AOL is a mass media corporation which, according to Verizon’s press release, can help Verizon “build the biggest media platform in the world”. AOl has acquired several companies in its corporate history, including Mapquest, Moviefone, Techcrunch and The Huffington Post.  The Huffington Post has been one of the most discussed issues of the Verizon-AOL acquisition, as rumors have swirled that Verizon plans to spin-off The Huffington Post for $1 billion.

20150520-Spin-OffWhat is a Spin-Off?

A spin-off is a mechanism for creating an independent company separate from the parent company. In a 100% spin-off, the parent company will dividend shares in the new company to its shareholders. This compensates the shareholders for the loss of value of the new company. In a partial spin-off, the parent company will distribute fewer than all of the shares in the new company.

What is the Purpose of a Spin-Off?

A spin-off is undertaken when the new company is expected to generate more value on its own than it would if it remained as part of the parent company. There are other reasons why corporations cite for pursuing a spin-off including allowing each entity to focus on its business strategy or to create a targeted investment opportunity in each of the business entities.

Spin-Off and M&A

A spin-off can also be combined with an M&A transaction, which is a particularly favorable option for shareholders of the parent company. Several media outlets have suggested that not only could Verizon spin-off The Huffington Post after the AOL acquisition, but that the Huffington Post may be acquired by a private equity firm or German based digital publisher Axel Springer.

In a spin-off and M&A combination, one of the key factors your client is going to be looking for is how to structure the transaction in a tax free manner. As always, one of the key initial steps when undergoing a complex transaction is to consult your tax colleagues and to do so as early as possible. The spin-off and M&A combination can take on different structures, but one option which I wanted to highlight in light of the Verizon/AOL/The Huffington Post Deal is what’s known as the Reverse Morris Trust.

Investopedia defines a Reverse Morris Trust as when a parent company “creates a subsidiary, and that subsidiary and a smaller external company merge and create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right and economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company.”

There are many issues you should consider in structuring a spin-off and M&A combination, and these are deal term specific so I won’t go into greater detail here, but as a corporate law practicioner, it is always good to generally know that this spin-off and M&A combinations exists, can be done semi-concurrently and if effected correctly, can yield financial benefits for your corporate client’s shareholders.

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