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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