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Chapter 17. Other Restructuring > Letter Stocks/Targeted Stocks

Letter Stocks/Targeted Stocks

In certain cases, companies prefer to partially divest their divisions by listing a division in the company while keeping it as part of the company. GM, for instance, listed its computer company EDS separately as GME, and its subsidiary Hughes, which is responsible for satellite communications (including Direct TV), as GMH. At first, the two companies continued operating as GM units rather than as independent companies. In the case of GMH, the voting rights of the GMH shares were determined as one-half of the voting rights of the GM share, and the dividend was determined according to the division's results of operations. The results of such separate listing are: Investors in the market have the possibility of investing in a targeted share; the company is now more focused thereby the “conglomerate discount” of its shares might be reduced; the company can raise capital for a certain division separately; the company can use securities for acquisition activities in the division's fields, and the division's compensation plans can be based on the divisions' shares. The parent company does not lose control of the divisions and continues to benefit from consolidated statements for tax purposes. It also continues enjoying any operating synergies without losing all of the other possibilities inherent in restructuring.

On the other hand, the company may experience aggravated conflicts with its divisions. In many cases, the investors in the targeted shares fear that the division is not managed with their interest in mind, but rather with that of the parent company's shareholders. As a result, letter stocks will typically trade at a discount to similar independent companies.


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