NEWSWIRE - FEBRUARY 2, 1998

Topic: Common Stock Valuation, Mergers, Divestitures

Source: "Vencor to Split Into Two Public Firms, One for Operations, One for Real Estate," by Chris Adams, Wall Street Journal, Monday, February 2, 1998, page A4.

Synopsis of Article: Vencor, a long-term health-care company that recently experienced a decline in its stock price, announced that it will split into two publicly traded companies. One company will comprise the operations of Vencor, running its hospitals and nursing homes, while the other will be a real-estate investment trust (REIT). The REIT will own the company's land, buildings, and improvements and will lease them to the operating company. Motivations for the split include: focus, taxes, changes in Medicare rules, and diversification. The new companies will share a common chairman, CEO, and one board member. Recent changes in Medicare rules have resulted in lower estimates of revenue growth for some of Vencor's units, resulting in lower operating margins and a one-day 28 percent decline in stock price.

Questions:

1. How does a decline in a company's stock price put pressure on management to react?

2. Using the equation for valuing common stock, discuss ways that Vencor's split will impact value.

3. Do shareholders of Vencor benefit from diversification because of the split?

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