Thermoelectron Accounting Issues

Funding to pursue new, profitable markets was limited. Should George Hatsopoulos, the CEO, President, and founder of Thermo Electron Corporation, proceed with a spin-out of its research and development (R&D) subsidiary, Thermo Electron Technologies Corporation, in order to raise needed capital. And, if Thermo Electron Technologies was spun-out, how could a positive relationship with stockholders be maintained and what accounting strategy could be used to effectively show earnings.

In order to pursue new markets with total forecasted revenues of approximately $48 million and operating income ranging from 10-20% per project, Thermo Electron Corporation should proceed with the spin-out of Thermo Electron Technologies. The use of put options to maintain external stockholder relationships and accounting by consolidated financial statements (equity method) are key to making the spin-out most beneficial.

A spin-out, as Thermo Electron Corporation discovered with their previous spin-out of Thermo Cardiosystems, was an effective way to raise capital to pursue new markets, especially for their business model. It bypasses the costly route of traditional venture capital financing by introducing Thermo Electron Technologies with a private offering of stock, and then when the market is right, following up with a public offering of stock (IPO). Thermo’s investment banker, Lehman Brothers, had indicated that the timing was favorable for a Thermo Electron Technologies IPO and that $11-13 per share (1.5 million shares) was feasible. This would provide the necessary capital needed to pursue the new, profitable markets (medical and airline “electronic vision”) that Thermo has lined up.

In order to encourage external stockholders to buy stock in the spin-out and maintain a good relationship with them, Thermo Electron should offer “put options” on the stock. Put options guarantee that Thermo Electron would repurchase the stock from investors at original offering price if the stock price fell below the original offering price anytime during an agreed upon time limit. This is basically a no loss, low risk strategy that encourages private equity investors to buy stocks of the spin-out and hold them. Thermo Electron could then bank the principal