Spin-Offs and Other Suggestions

Subsidiary DLC for Capitalism Lab
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buells
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Joined: Sun May 25, 2014 7:38 pm

Spin-Offs and Other Suggestions

Post by buells »

I think true spin-offs would be great (essentially a demerger). Selling down your stake in a subsidiary over time is kind of inefficient from a timing and economic perspective. The Parent may not need cash and it may not want to slowly sell down its share and take a loss relative to market price every time it sells.

Parent Co should be able to distribute its shares in a sub pro-rata to parent company shareholders. The biggest challenge here is what to do with fractional shares if you are spinning without. In real life, this is a very simple problem to deal with, but the stock market mechanics in the game are less adapted for this. One way to do it: distribute 1 spin-co share for every parent share and immediately do a 10 for 1 reverse stock split if Spin Co trades below say $10 at time of spin. This happens in real life all the time and would be easy enough to implement.

Now if you do an IPO pre-spin, this gets harder to deal with. This is because your Sub already has an actual price, so there will be a set distribution ratio if you want to give the parents' Sub shares to Parent investors (you can't arbitrarily dilute the minority investors). If possible, maybe you have parent pay cash for fractional shares. I understand this might be really hard to do, so maybe only make spin-offs possible as an alternative to doing a Sub IPO.

By far the coolest corporate separation techniques are the Split-Off and Reverse Morris Trust (Spin or Split + Merger). I don't think it is possible to introduce either into the game because they are really complex to execute even in real life. You need a really sophisticated AI to do either. But just for fun, I'll tell you that the split-off consists of offering ParentCo investors the opportunity to tender Parent Shares in exchange for Split-Off shares. You offer the Split Co shares at a discount to Parent shareholders and they exchange Parent shares for Sub shares. Too complex to have them make a reasonable comparison in the game. It is a really tax efficient way of distributing shares in a subsidiary and buying back stock at the same time.

In real life, tax considerations tend to drive spin-offs, but that is one thing I don't think anyone wants to introduce into Cap Lab :lol:
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