Bristol-Myers Squibb Splits Off Rest of Mead Johnson

question 108

Essay

Bristol-Myers Squibb Splits Off Rest of Mead Johnson
Facing the loss of patent protection for its blockbuster drug Plavix, a blood thinner, in 2012, Bristol-Myers Squibb Company decided to split off its 83% ownership stake in Mead Johnson Nutrition Company in late 2009 through an offer to its shareholders to exchange their Bristol-Myers shares for Mead Johnson shares. The decision was part of a longer-term restructuring strategy that included the sale of assets to raise money for acquisitions of biotechnology drug companies and the elimination of jobs to reduce annual operating expenses by $2.5 billion by the end of 2012.
Bristol-Myers anticipated a significant decline in operating profit following the loss of patent protection as increased competition from lower-priced generics would force sizeable reductions in the price of Plavix. Furthermore, Bristol-Myers considered Mead Johnson, a baby formula manufacturer, as a noncore business that was pursuing a focus on biotechnology drugs. Bristol-Myers shareholders greeted the announcement positively, with the firm's shares showing the largest one-day increase in eight months.
In the exchange offer, Bristol-Myers shareholders were able to exchange some, none, or all of their shares of Bristol-Myers common stock for shares of Mead Johnson common stock at a discount. The discount was intended to provide an incentive for Bristol-Myers shareholders to tender their shares. Also, the rapid appreciation of the Mead Johnson shares in the months leading up to the announced split-off suggested that these shares could have attractive long-term appreciation potential.
While the transaction did not provide any cash directly to the firm, it did indirectly augment Bristol-Myer's operating cash flow by $214 million annually. This represented the difference between the $350 million that Bristol-Myers paid in dividends to Mead Johnson shareholders and the $136 million it received in dividends from Mead Johnson each year. By reducing the number of Bristol-Myers shares outstanding, the transaction also improved Bristol-Myers' earnings per share by 4% in 2011. Finally, by splitting-off a noncore business, Bristol-Myers was increasing its attractiveness to investors interested in a "pure play" in biotechnology pharmaceuticals.
The exchange was tax free to Bristol-Myers shareholders participating in the exchange offer, who also stood to gain if the now independent Mead Johnson Corporation were acquired at a later date. The newly independent Mead Johnson had a poison pill in place to discourage any takeover within six months to a year following the split-off. The tax-free status of the transaction could have been disallowed by the IRS if the transaction were viewed as a "disguised sale" intended to allow Bristol-Myers to avoid paying taxes on gains incurred if it had chosen to sell Mead Johnson.
British Petroleum Sells Oil and Gas Assets to Apache Corporation
In the months that followed the oil spill in the Gulf of Mexico, British Petroleum agreed to create a $20 billion fund to help cover the damages and cleanup costs associated with the spill. The firm had agreed to contribute $5 billion to the fund before the end of 2010. To help meet this obligation and to help finance the more than $4 billion already spent on the spill, the firm announced on July 20, 2010, that it had reached an agreement to sell Apache Corporation its oil and gas fields in Texas and southeast New Mexico worth $3.1 billion; gas fields in Western Canada for $3.25 billion; and oil and gas properties in Egypt for $650 million. All of these properties had been in production for years, and their output rates were declining.
Apache is a Houston, Texas-based independent oil and gas exploration firm with a reputation for being able to extract additional oil and gas from older properties. Also, Apache had operations near each of the BP properties, enabling them to take control of the acquired assets with existing personnel.
In what appears to have been a premature move, Apache agreed to acquire Mariner Energy and Devon Energy's offshore assets in the Gulf of Mexico for a total of $3.75 billion just days before the BP oil rig explosion in the Gulf. The acquisitions made Apache a major player in the Gulf just weeks before the United States banned temporarily deep-water drilling exploration in federal waters.
The announcement of the sale of these properties came as a surprise because BP had been rumored to be attempting to sell its stake in the oil fields of Prudhoe Bay, Alaska. The sale had been expected to fetch as much as $10 billion. The sale failed to materialize because of lingering concerns that BP might at some point seek bankruptcy protection and because the firm's creditors could seek to reverse an out-of-court asset sale as a fraudulent conveyance of assets. Fraudulent conveyance refers to the illegal transfer of assets to another party in order to defer, hinder, or defraud creditors. Under U.S. bankruptcy laws, courts might order that any asset sold by a company in distress, such as BP, must be encumbered with some of the liabilities of the seller if it can be shown that the distressed firm undertook the sale with the full knowledge that it would be filing for bankruptcy protection at a later date.
Ideally, buyers would like to purchase assets "free and clear" of the environmental liabilities associated with the Gulf oil spill. Consequently, a buyer of BP assets would have to incorporate such risks in determining the purchase price for such assets. In some instances, buyers will buy assets only after the seller has gone through the bankruptcy process in order to limit fraudulent conveyance risks.

-How could Apache have protected itself from risks that they might be required at some point in the future to be liable
for some portion of the BP Gulf-related liabilities? What are some of the ways Apache could have estimated the potential costs of such liabilities? Be specific.

---

Definitions:

Marginal Cost

The price of creating one more unit of a particular product or service.

Marginal Revenue

The additional income generated from selling one more unit of a product or service, crucial for decision-making in production and pricing strategies.

ΔTR/Δq

Represents the change in total revenue divided by the change in quantity sold, indicating marginal revenue.

TR/q

Represents Total Revenue divided by quantity, a formula used to calculate average revenue per unit sold.