Verecloud, Inc. (VCLD)

[©PROPHETABLE]

?These transactions also create value to shareholders. The reasons of the wealth creation might be the same as in the case of an equity-carve-out. The difference is that the parent firm does not receive financing in the transaction.
3.?Asset sell-offs:
The subsidiary is sold to a third party, so no new firm is created, and the parent firm receives cash in the transaction.
?Asset sell-offs also create value to shareholders of the parent firm (the selling part in the transaction). Because no independent firm is created the sources of value are different from those of spin-offs and equity carve outs.
The three types of transaction (spin-offs, equity carve outs and asset sell-offs) should negatively affect the parent and subsidiary rival firms.
If you think about these transactions as financing alternatives to equity issuances, how would you justify the selection of one of these transactions?
In an equity carve-out, the firm is issuing equity in a subsidiary, instead of issuing in the parent firm. This can be justified if managers believe that the parent firms stock is undervalued, and the subsidiary is overvalued. If this is the case, the equity carve out should convey good news to the parent firm and bad news to the subsidiary. Empirical studies show a positive reaction to the parent firm and a negative reaction to rivals of the subsidiary firm. These results are consistent with the view by managers that the parent firm is undervalued and the industry in which the subsidiary operates is overvalued. ?These empirical findings suggest that equity carve-outs can be regarded as a substitute to equity financing.
A spin-off involves no cash exchange and the wealth implications to rival firms should be different.
Finally, the cash originated in an asset sell-offs can be regarded as the avoidance to issue public equity. The sale is a private transaction and the gains might be derived from the avoidance of negative implications of issuing public equity.
The empirical evidence indicates that rivals of subsidiaries of equity-carve outs experience a loss of wealth at the announcement of the equity-carve out. However, rivals of spin-offs experience positive returns, and there is no significant gains or losses of units that have been sold in an asset sell-offs.