American Cyanamid’s Cytec’s Spin-Off Ron Bangco Frank Abrao Katie O’Neal Christina Natale

The Chemical Division Spin-off into Cytec Industries Agenda: The Chemical Division Spin-off into Cytec Industries

History of American Cyanamid Founded in 1907 as a manufacturer of fertilizer, calcium cyanamide In the 40’s and 50’s, they strengthened their position in medical products Lost market share in its consumer products division in the 60’s and 70’s In the 80’s Cyanamide focused on its core businesses (life sciences) Sell or spin-off unrelated or poorly performing assets 90’s, Cyanamid initiated asset sales of some of its consumer products 90’s, Prior to spin-off sold some of its chemical business without their liabilities

Chemical Division (Cytec) 1990 - Chemical businesses generated 25% of sales, posted $171.5 million loss 1991 - Chemical division generated 23% of sales with only 5% earnings 1991 - Chemicals division’s made a separate, unincorporated business unit called Cytec Industries 1993 - Cytec officially spun off Cyanamid - Cytec (chemical division) held unrelated businesses - Held liabilities of previously sold businesses

Net Income of American Cyanamid's Division

Chemical Division (Cytec's) Sales and Net Income (in millions)

Advantages to Cyanamid Focused on core competency Reduce liabilities Environmental Retiree Health Care Life Insurance Pension Dividend’s of $14.6 million per year

Divestiture options on chemical division (Cytec Industries)? Asset Sale Equity Carve Out Spin-Off

Subsidiary is sold to a third party Asset Sale Subsidiary is sold to a third party No new firm is created No effect to rivals Pros Receives Cash Creates value to shareholders of parent firm Cons Tax Implications – Tax on sale AI – stock is overvalued

Equity Carve Out Parent firm issues equity of a subsidiary Parent firm receives cash New firm is created Subsidiary Substitute to equity financing Buyers of new stock become shareholders of the subsidiary firm Parent Firm usually maintains a controlling interest in the new firm

Equity Carve Out Pros Creates value to shareholders of parent firm Incentives for management Greater monitoring AI – signaling parent firm undervalue Cons Tax Implications – Tax on sale AI – subsidiary stock is overvalued Transaction Cost

Spin-Off Equity issuance New firm is created Parent firm does not receive cash in transaction New shares distributed to existing shareholders as a pro rata dividend Shareholders of the new independent firm are the same share holders as the shareholders of the parent firm Tax free transactions Distributes minimum 80% of the shares for the subsidiary

Spin-Off Pros Creates value to shareholders of parent firm Greater monitoring Positive information on subsidiary Cons Rivals of Spin-off experience positive return

How is Value Added? Better Management of new independent carved out firm (Equity Carve Out and Spin-Off) Easier to set up incentive based contracts Publicly traded equity Compensated on stock performance Greater monitoring and information production about the new firm Analysts, Credit Ratings…

Equity Structure Cytec issued approx. 12.8 million shares of common stock pro rata to Cyanamid shareholders 7 shares of ACY received 1 share of CYT Cytec issued preferred stock to Cyanamid with aggregate face value of $200 million Three tranches Tax implications Gave up tax advantage to retain more control

Three Tranches Series A Annual cash dividend, 15 year life, transferable and redeemable after 4 years, in full after 6 years Series B Annual cash dividend, 15 year life, transferable, convertible to 30% of Cytec stock *Covenant for Series A and B: missed dividend payment of 6 or more, entitles the right to elect 2 directors Series C Annual cash dividend, perpetual life, restricted covenants, non-transferable, entitles election of 1 director

Announcement Date at close Calculating Value Announcement Date at close February 23 Closing Price February 22 $47.00 February 24 $49.25 Change 4.8% increase in value

Standing Behind Our Decision Ron Bangco Frank Abrao Katie O’Neal Christina Natale Q&A