DuPont’s Divestiture of Conoco

DuPont began life in 1802, as a gunpowder manufacturing telephone circuit supplying the US Army under President Thomas Jefferson. The in alliance had a long tradition of technological innovations in business and it continues to process worldwide commercialise places including food and nutrition health c be agriculture air and apparel home and construction and electronics. Among more or less of its inventions are nylon sproutings invented in 1939, polytetrafluoroethylene for pans, Kevlar for bullet-proof vests, stainmaster for carpets, the synthetic fabric lycra, and Dacron for clothing.In 1999 the partiallyicipation held a portfolio of cc0 trademarks and brands. DuPont was the 15th largest troupe in the US with its 1998 revenue reaching $45. 1 billion. The fraternity operated 200 manufacturing and processing facilities in 65 countries with 98,000 employees worldwide. Conoco began in 1875 as the Continental inunct and Transportation Co. , one of the first petroleum market ers in the West. The company has make it through plenty of tough and challenging times from the stock market crashing just a month after Conoco took its stock man, to overseas expansion, to the oil color crisis of the 19070s.thence in 1981 a simple proposal by Canadas bean plant Petroleum about acquiring a Conoco appurtenant, Hudsons Bay Oil and bollix up left the company wide open. In order to assure an sufficient supply of petroleum products to use as chemical feed stocks, DuPont bought Conoco on Sept. 30, 1981. Conoco became a wholly possess DuPont subsidiary in the largest merger invariably at that time, costing DuPont $7. 8 billion. As a subsidiary of DuPont, Conoco became a major, integrated, global energy company operating in 40 countries worldwide.The company was involved in some(prenominal) downstream and upstream activities like exploring for, developing, refining, market, transporting, and interchange crude oil and natural gas. In 1998, Conoco ranked 8th in wo rldwide production of petroleum liquids by US companies, 11th in natural gas production, and 8th in refining throughput. In 1997 both DuPont and Conoco planned to pursue new corporate strategies DuPont wanted to transform into a life sciences company focused more on biotechnology and less(prenominal) on petrochemicals, and Conoco sought after financial independence to make significant irrelevant asset investments.While part of DuPont, Conoco doubled its value betwixt 1986 and 1996, and realigned its assets. By late 1998, DuPont divested Conoco in a 2-step process. First it would mete out a minority stake in Conoco through an initial national offering otherwise know as an IPO carve-out. Then it would execute a spin-off and sell the rest of its ownership interest in the subsidiary at a by and by time. Under the split-off, DuPont shareholders would be given the opportunity to exchange their DuPont shares for shares in Conoco at a predetermined ratio of 2. 5 to 1.Participation i n the exchange rate would be all in all voluntary. On October 22, 1998 the Conoco IPO good $4. 4 billion for 30% of Conoco culminating in the largest IPO in history. Then on August 9, 1999 the swap of DuPont stock for Conoco stock was finalized. DuPont secured about $21 billion in after tax value through the IPO and stock swap. I theorize DuPonts two-stage divestiture worked the best because the company was up to(p) to make the transaction tax-free at both the corporate and in the flesh(predicate) levels. This basically means that DuPont sold off shares of Conoco in two split up stages.The company avoided the corporate capital gains tax by structuring the deal as a primary offering, which is the first of issuance of stock for overt trade from a private company. Under this approach Conoco would sell new shares to the public and use the money from the offering to pay down an equivalent tot of its debt. If a second offering had been used, DuPont would directly sell a band of its Conoco shares for cash, possibly creating a capital gains tax liability for itself if the sale consequence exceeded its tax basis in the shares.The primary public offering of 25% of Conoco by DuPont was in like manner good for shareholders because it met the objectives of maximizing shareholder value and it too allowed Conoco to capitalize on different investment opportunities for energy companies going on at the time. In order to make the second stage completely tax free DuPont had to satisfy a number of IRS rules and regulations. These rules stated that DuPont had to harbour Conoco immediately before the split-off, meaning that it had to control at least 80% of Conocos stock. In addition the split had to be motivated by a valid business purpose.Also DuPont had to get rid of all Conoco stock so it would not have any control over the company after the deal was completed. Conoco had to be recapitalized or reorganized into two classes of common stock. Class A stock that carrie d one vote each, issued to the public and Class B stock with five votes each, retained by DuPont for later disbursement to DuPont shareholders in the exchange offer. Prior to the IPO, Conoco would have to issue a $7. 5 billion promissory note to DuPont as a dividend. The stipend would be tax free to both parties because at the time DuPont owned all of Conoco.Conoco would in turn, use the proceeds to pay back part of the note and other intercompany notes with DuPont. While I do agree with the gaffer Operating Officer that a nose candy% IP of Conoco would raise a significant amount of cash to use in our core business growth internationally, allowing us to expand our global operations. I think the candour care-out was the best choice for DuPont to do instead of a complete 100% IPO. The reason I say that is because the deal still allowed DuPont to raise some capital but it also allowed DuPont to retain firm control of the subsidiary before, selling the remaining shares in a tax-free spin-off at a later date.A 1998 working paper from Pennsylvania res publica University examined 83 equity carve-outs done amidst 1981 and 1990, and raise that carved-out companies had significantly higher(prenominal) revenue and asset growth, higher earnings, and higher capital spending than the manufacture average during the first three yrs after the carve-outachievements, the authors say, that are a direct result of 80 percent of the deals tying executive salary to the share price of the carved-out company at the time it goes public. Its a bearing of providing a stronger incentive for subsidiary executives to perform, says James A.Miles, one of the authors of the study, along with eelpout Hulburt and J. Randall Woolridge. Parent companies also benefit from a carve-out. The Penn State study, in fact, order that these companies had a higher return on assets in the first year after the carve-out. And a similar study by J. P. Morgan & Co. , which examined 101 carve-outs betw een 1986 and 1997, documented that, on average, the share price of the parent rose between 3 and 4 percent in the 90 days chase the announcement of a carve-out.The companys ownership of Conoco has added great marketing and purchasing clout to DuPonts operations just like the determination maker VP for Research and Development and Product Development suggests, but again I dont think that owning a majority share would benefit the company like getting rid of all ownership would do. The decision to retain majority ownership, however, may limit the upside to the deal. The J. P. Morgan study found a distinct difference in the share price transaction of carve-outs that later became spin-offs and carve-outs that did not.In the case of 12 carve-out companies in which the parent announce there would be a later spin-off, the share price of the carve-out performed 11 percent above the market 18 months after the initial public offering. The shares of all other carve-outsthose without an ann ounced spin-off lateractually underperformed the market by 3 percent. In closing I think DuPont did the overcompensate thing when they decided to go through with a two-stage divestiture of Conoco. I think they got the most bang for their buck by doing the deal this way.DuPont was able to cyberspace $4. 4 billion for 30% of Conoco resulting in the largest IPO in U. S. history. DuPont was also able to spin-off the rest of their shares of Conoco and secured about $21 billion in after tax value through the IPO and a stock swap. I think this was the best move because both companies were looking to go in different directions. DuPont wanted to transform into a life sciences company focused more on biotechnology and less on petrochemicals, and Conoco desired financial independence to make significant foreign asset investments.References1. England, Robert Stow. (1999). How companies are unlocking value by carving out pieces of their business. CFO Magazine, March 1999, Retrieved April 2011, from http//www.spinoffadvisors.com/articles/cfomagazine0399.htm2. Conoco Phillips network Site. Retrieved April 2011, from http//www.conocophillips.com/EN/about/who_we_are/history/conoco/Pages/index.aspx3. Chemical Online. (1998, May 11). Chemical Online. DuPont Announces Plans to disinvest its Conoco Energy Operations. Retrieved April 2011, from http//www.chemicalonline.com/article.mvc/DuPont-Announces-Plans- to-Divest-its-Conoco-E-0001.4. Ohio University. DuPont spins off Conoco Good Move for ConocoRetrieved April 2011, from http//oak.cats.ohiou.edu/rm663596/esp/case.htm