Spin Offs / Carve Outs feature suggestion

[vinng]

I'd like to suggest the idea of spinning off a collection of firms and IPO it. It would be a great addition of tools in corporate world. I tried searching for this topic but I couldn't really find it so please redirect me if there is one already.

In my current game, after having acquired several companies that I think would be value accretive, I realize that despite the increased revenue and profit figures, my profitability ratios and margins have declined due to the mixture of product classes. A spin off feature will allow me to get rid of the offending product class and make money off of it as well.

It's similar to the ability to IPO a private company under the expansion pack poll topics but what I'm suggesting is simpler:
1. Choose the firms you want to group up to spin off,
2a. Choose the new CEO and name of the new corporate
2b. Give it some level of cash.
2c. Choose the % of the new company's shares to float.
3. Click "Spin off" button.

It will probably take just two screens or two dialog boxes to do this.

Some basic rules to Spin off:
1. the cumulative revenues of these firms must be larger than $XXX (I dunno what's the best balance, maybe $300mn or 500mn?)
2. must be profitable (maybe certain %?)
3. must have some minimum level of cash (say $50mn)?
3. The listing PE could follow the market PE (simplest but also more real-life like) or there might be a virtual bookbuilding (more complex).
4. Minimum % of shares to float can be 20% or something

It could also open up new gameplay strategies e.g.
- play as private equity firm who take companies private, restructure, recapitalize and re-list them at high multiples.
- much more flexible gameplay, mix and match assets from different acquired companies and spin off appropriately.

So hopefully it's something that can be implemented quickly in the near future releases?

Feel free to comment or if you think it's prone to abuse, redundant etc.

Thanks
Vince

Note to moderator/admin: I posted this in the wrong forum:
http://www.capitalismlab.com/forum/view ... =37&t=2404
Please help to remove the post if necessary. Thanks

[Slimp]

I have been thinking about this as well. If this would be implemented, it would be much easier to direct your company in a certain direction and generate cash to invest in a different place.

I support this suggestion strongly!

[buells]

So what you are describing would be a carve out/subsidiary IPO. A spinoff feature would give you the option to undertake a pro-rata distribution of spin-company shares to parent company shareholders. The problem with taking a group of firms and separating them from the parent company (in real life as well as in the game) is that investors have a hard time valuing them (and the stub company, which consists of the parent's leftover assets) separately.

The whole is often greater than the sum of the parts, so the financials for a particular retail store/factory as part of the parent company may not reflect what they would be earn on a standalone basis. Think about brands and technology. How do you distribute these intangible assets among the new companies? What about management expertise? There are a lot of moving parts that make it difficult to even simulate pro-forma financials for a group of firms.

If the parent company is forced to retain a large majority stake in the subsidiary for an extended period of time, there is an incentive for the player to assign resources to the sub sufficient for its success upon separation. That could help prevent it being used as an exploit. Nonetheless, it would be remarkably difficult to value the public stake. One possible way to structure this feature would be to let the player IPO the subsidiary at replacement value. Then, the player could divest the stake over time as the subsidiary establishes a track record and its value adjusts to reflect its financial performance.

An additional consideration is what the SEC might consider fraudulent conveyance. This isn't so much an issue for subsidiary IPOs, but if an actual spinoff is included, you need to worry about the impact on debtholders. Essentially, a portion of the operating income available to all investors is made exclusively available to equity investors. In the context of the game, this could allow the player to borrow over their credit limit. There isn't much value to doing that from a gameplay perspective, however, so I wouldn't limit the feature on the grounds of preventing exploitation of the banking system.

[Arcnor]

I like this idea a lot.

[Zlot]

Very good idea.