The divestiture technique that Lee is recommending is most likely:

Mark Zin and Stella Lee are CEO and CFO, respectively, of Moonbase Corporation.
They are concerned that Moonbase is undervalued and subject to a hostile takeover bid. To
assess the value of their own firm, they are reviewing current financial data for Jupiter PLC,
Saturn Corporation, and Voyager Corporation, three firms they believe are comparable to
Moonbase.
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part-i-10 13 January 2012; 10:24:24
Relative Valuation Ratio Jupiter Saturn Voyager
P/E 23.00 19.50 21.50
P/B 4.24 5.25 4.91
P/CF 12.60 11.40 13.30
Zin believes Moonbase should trade at similar multiples to these firms and that each
valuation ratio measure is equally valid. Moonbase has a current stock price of $34.00 per
share, earnings of $1.75 per share, book value of $8.50 per share, and cash flow of $3.20
per share. Using the average of each of the three multiples for the three comparable firms,
Zin finds that Moonbase is undervalued.
Lee states that the low valuation reflects current poor performance of a subsidiary of
Moonbase. She recommends that the board of directors consider divesting the subsidiary in a
manner that would provide cash inflow to Moonbase.
Zin proposes that some action should be taken before a hostile takeover bid is made. He
asks Lee if changes can be made to the corporate governance structure in order to make it
more difficult for an unwanted suitor to succeed.
In response, Lee makes two comments of actions that would make a hostile takeover
more difficult. Lee’s first comment is “Moonbase can institute a poison pill that allows our
shareholders, other than the hostile bidder, to purchase shares at a substantial discount to
current market value.” Lee’s second comment is: “Moonbase can instead institute a poison
put. The put allows shareholders the opportunity to redeem their shares at a substantial
premium to current market value.”
Zin is also concerned about the general attitude of outside investors with the governance
of Moonbase. He has read brokerage reports indicating that the Moonbase governance ratings
are generally low. Zin believes the following statements describe characteristics that should
provide Moonbase with a strong governance rating.
Statement 1: Moonbase’s directors obtain advice from the corporate counsel to aid them
in assessing the firm’s compliance with regulatory requirements.
Statement 2: Five of the ten members of the board of directors are not employed by
Moonbase and are considered independent. Though not employed by the
company, two of the independent directors are former executives of the
company and thus can contribute useful expertise relevant for the business.
Statement 3: The audit committee of the board is organized so as to have sufficient
resources to carry out its task, with an internal staff that reports routinely
and directly to the audit committee.
Zin is particularly proud of the fact that Moonbase has begun drafting a “Statement of
Corporate Governance” (SCG) that would be available on the company website for viewing
by shareholders, investment analysts, and any interested stakeholders. In particular, the SCG
pays special attention to policies that ensure effective contributions from the board of
directors. These policies include:
Policy #1: Training is provided to directors prior to joining the board and periodically
thereafter.
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part-i-10 13 January 2012; 10:24:24
Policy #2: Statements are provided of management’s assessment of the board’s performance of its fiduciary responsibilities.
Policy #3: Statements are provided of directors’ responsibilities regarding oversight and
monitoring of the firm’s risk management and compliance functions.
Zin concludes the discussion by announcing that Johann Steris, a highly regarded
ex-CFO of a major corporation, is under consideration as a member of an expanded board of
directors. Zin states that Steris meets all the requirements as an independent director
including the fact that he will not violate the interlocking directorship requirement. Steris also
will bring experience as a member of the compensation committee of the board of another
firm. He also comments that Steris desires to serve on either the audit or compensation
committee of the Moonbase board and that good governance practice suggests that Steris
would not be prohibited from serving on either committee
A. a spin-off.
B. a split-off.
C. an equity carve-out.

Answer: C. an equity carve-out.