Basic math tells us that the whole is equal to the sum of its parts. But companies leading a wave of corporate separations clearly feel their parts add up to more than that – and a new paper authored by EY and our M&A structuring team at Goldman Sachs suggests that they may be on to something.
The authors consider why spinoffs and other separations have grown in popularity among big companies of late, and what makes for a successful spinoff. Though corporate separations have been around for decades, “they’ve been given new prominence in a company’s portfolio review strategy in recent years,” the authors of their co-published study wrote. In 2022 alone, there were 30 announced corporate separations – such a large spike that they represented more than 15% of announced transactions over the last decade.
Studying roughly 160 global transactions during the 2012-22 period in which the business being separated had a market capitalization higher than $1bn, as well as first-hand interviews with executives, the authors analysis showed that “when corporate separations are executed well, they can lead to an excess blended return of roughly 6% from announcement to two years post-close as compared with their respective company’s sector index.”
Companies split up their businesses for all kinds of reasons. Often, they have competing priorities or different capital allocation needs, to name two. But the authors suggest that the recent spike in such transactions’ popularity is also a reflection of current market dynamics. The pandemic and financial market uncertainty has led companies to rethink their priorities and evaluate options for repositioning their portfolios, given the challenging operating and competitive conditions that have prevailed as a result.
Rising interest rates have contributed to the rise in spinoffs as well. After a decade of low cost of capital with US federal funds rates near zero, the rapid increase to an over 5% rate benchmark is having “a material impact on growth priorities and associated capital allocations and portfolio decisions,” according to the firms.
There’s also a “self-help” aspect at work, the authors conclude. Unlike a sale, spinoffs and “demergers” aren’t reliant on a counterparty. That makes them easier to pull off. Separations have also gotten bigger in recent years: nearly half of all separations that closed between 2018 and 2022 were valued at greater than $5 billion, compared to 34% in the five years prior, the authors found.
All of this helps explain why corporate separations have increased. According to the latest EY CEO Outlook Survey, almost half of the CEOs polled say they expect to actively pursue a divestment, spin or IPO over the coming 12 months.
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