Corporate spinoffs are all the rage, with CEOs and investors promising increased value and focus. But do these breakups really work? This article dives into the messy reality of corporate divisions, revealing why simplicity is harder than it looks.
Key Takeaways:
- Spinoffs are often touted as a way to unlock value and streamline operations.
- Historical data shows mixed results, with many spinoffs failing to outperform the market.
- Ego, pay, and simplistic growth strategies often drive breakup decisions.
- Careful planning and execution are crucial for a successful corporate division.
The Allure of the Spinoff: Why Break Up a Company?
In the world of high finance, the idea of breaking up a company often sounds like a stroke of genius. Investors, bankers, and CEOs love to talk about the benefits: increased focus, streamlined operations, and unlocked value. The promise is that by separating different parts of a business, each can thrive on its own, leading to greater overall success.
But is it really that simple? A closer look at the history of corporate spinoffs reveals a far more complicated picture. While some breakups have indeed created value, many others have fallen flat, failing to deliver the promised results. So, what’s the real story behind these corporate divorces?
The Ego Factor: Size Matters (or Does It?)
Let’s be honest: most bosses like to build empires, not shrink them. It’s often easier to buy another company and cut costs than to untangle a business that’s already deeply embedded within a larger enterprise. While conglomerates may have fallen out of favor, the idea of creating long-term value by splitting them into smaller, more focused units can be as shaky as believing that one plus one equals three in an acquisition.
A History of Mixed Results
Over the past decade, CEOs worldwide have announced nearly $1.7 trillion worth of spinoffs and similar separations, where a unit starts trading independently with a market capitalization of at least $1 billion, according to Reuters Breakingviews data. And there’s plenty more in the pipeline.
Common reasons for these moves include:
- Streamlining operations
- Helping bosses focus
- Highlighting faster-growing or more profitable divisions
- Taking advantage of valuation differences
For example, WH Group spun off its U.S.-based Smithfield subsidiary to draw geographic distinctions with its China business. Similarly, Holcim is doing the same with its North American arm. Comcast plans to create a new publicly traded company for networks like CNBC, while Honeywell faces pressure to separate aerospace and defense from industrial automation.
DuPont, already divided into three units, intends to split again.
The Numbers Don’t Lie: Skepticism is Warranted
While the logic behind spinoffs often sounds good, the outcomes are mixed at best. Separations led to a blended excess return about 6% higher than for their respective sector indices, research conducted by Goldman Sachs and consultancy EY found.
However, further analysis by Breakingviews reveals more cause for concern. In a sample of 60 significant U.S. examples since 2015, where both parent and SpinCo are still publicly listed, more than a third of the time, one of the two companies has generated a negative total shareholder return.
In eight cases, both destroyed value following a split, as happened with Xerox and Conduent since their separation in 2017, and Bath & Body Works and Victoria’s Secret since 2021.
The Hedge Fund Factor: Elliott’s Big Bet on Honeywell
Aggressive hedge funds often push for corporate breakups to target sprawling businesses. Recently, Elliott Investment Management invested $5 billion in Honeywell, its largest investment ever, to convince the company to split up. Elliott projected a potential 75% share-price boost over two years, citing examples like General Electric and United Technologies.
The Devil is in the Details: Smoothly Moving Parts are Key
Even successful breakups like those at GE and United Technologies benefited from significant increases in demand and valuation multiples for power providers and cooling-system installers. These conditions are hard to replicate, especially given the time it takes to separate various components.
Moreover, GE’s healthcare arm has generated lower returns than the S&P 500, as has RTX’s separated elevator business, Otis Worldwide.
Like the conglomerates themselves, a successful split requires many smoothly moving parts, including:
- Respective capital structures
- Management
- Division of assets
- Customer experiences
Finding the right fund managers and brokers to cover the two pieces can also be crucial.
Cutting Through the Spin: Is a Breakup Right for You?
The prospect of a corporate cleanup is always appealing, but it’s often difficult to see through the marketing hype. Before considering a spinoff, companies should carefully weigh the potential benefits against the very real risks.