DuPont divests Conoco - Case Study Example

Dupont divests Conoco Dupont ended up proceeding with a equity carve-out of Conoco, its subsidiary, for $4.4 billion. A carve-out happens when a parent company sells a full or minority interest in its subsidiary to the investing public. The transaction involving Conoco consisted of a two-stage transaction. First an equity carve out occurred in 1998 for 30% of Conoco shares then in 1999 the other 70% were divested by a “variant of a spin-off” which is an exchange offer where Dupont shareholders choose between keeping their shares or exchanging the stock for parent stock.

By doing this Dupont was able to achieve a positve market, firm return, and net return. The divestiture should be made from a financial perspective and not arbitrarily in order to create more vaule for the firm by breaking the firm into more pieces. Considerations must be made to analyze what effect a carve-out could have on the company? What effect could a spin-off have on the company? What effect could an asset sale have on the company? All these options must be considered in relation to market, firm return and net return.

The main benefit of divestiture is the production of wealth for the parent company. Historically the divestiture of a company has caused a positive Net Present Value (NPV) based on the size of the company based on “Takeovers, Restructuring and Corporate Governance”. “Alchian and Demsetz (1972) and Jensen and Meckling (1976) suggest one reason why corporate divestitures might create wealth. If the divestitures improve managerial incentives or better enable shareholders to monitor managerial performance, then the separation of a corporation into different pieces can improve the efficiency of operations and thereby increase the combined value of the assets.

” Another point of view is that the initial announcement date might increase the company value. The risks are that the divestiture will not produce any wealth. There is a possibility that splitting up the companies will not cause the parent company to have a positive net return or any kind of return. The other risk is that the divestiture doesn't happen and thus the gain in net return is lost. The disadvantages of splitting the companies up is that the synergy that was once a strength is no longer a strength.

In divesting of Conoco, Dupont loses its control over OPEC and its supply chain. This could lead to issues for Dupont in the long run if the prices are fluctuating. Conoco should be partly divested first in an equity carve-out then the other shares used in a exchange offer. That is exactly what the previous decision was to do and it was effective in maximizing shareholders value. The charts in “Takeovers, Restructuring and Corporate Governance” show that the highest return was first Rockwell International's spin-off then Conoco's divestiture.

The ratio of this divestiture should be different in this case in order to gain even more return. A divestiture of 40% in an equity carve-out would mean ($4.4 billion divided by .30 and multiplied by .40) $5.8 billion for the divested shares and the other shares would be exchanged. The reason to avoid going over 40% is to make sure the market deems the parent company to be strong.