Interview, Podcast
Breaking Free: The rise of corporate separations
- Market Trend: Global corporate separation activity (spinoffs, sales, divestitures) is accelerating in a subdued M&A environment; over 30 global separations were announced in 2022.
- Sentiment Shift: Corporate strategy has pivoted from post-2008 diversification and consolidation toward simplification to unlock portfolio discounts.
- S&P 500 Complexity: Roughly two-thirds of S&P 500 companies currently operate with at least three segments generating over $500 million in revenue, a metric experts cite as driving the need for simplification.
- Primary Drivers:
- Pandemic Impact: Internal strategic reviews triggered by the pandemic have caused companies to reimagine their business mixes.
- Cost of Capital: The shift from near-zero rates to an elevated cost of capital environment prioritizes profitability over "growth at any cost."
- Slowed Organic Growth: Management teams are increasingly focusing on margin improvement, viewing separations as "addition by subtraction."
- Sector Prevalence:
- Top Sectors: Activity is most concentrated in diversified pharmaceuticals and diversified industrial products.
- Emerging Sectors: Anticipated expansion into technology and consumer products, exemplified by Alibaba's plan to split into six companies and Porsche's European moves.
- Value Creation Mechanisms:
- Operational Focus: Separations allow for dedicated management focus on narrower business sets, driving operational efficiencies.
- Capital Allocation: New companies gain independent capital structures to optimize allocation for specific business profiles rather than a conglomerate average.
- Talent Retention: New equity currency enables companies to attract and retain talent in competitive markets.
- Investor Alignment: Transitions aim to migrate a broad conglomerate shareholder base to a pure-play base with specialized sector research coverage.
- Performance Metrics:
- Success Horizon: Goldman Sachs and EY recommend measuring transaction success at the two-year mark post-separation to account for transition service agreements and complex operational separations (e.g., in China and India).
- Outperformance: Successful transactions historically outperform the S&P 500 sector index by mid-single digits over this two-year period.
- NUCO Growth: New Company (NUCO) stock performance shows the highest correlation with revenue growth vectors.
- RemainCo Strategies:
- Stranded Costs: Beyond eliminating stranded costs, RemainCos are advised to re-engineer back-office functions (G&A), renegotiate vendor contracts, and leverage data analytics post-separation.
- Guiding Principle: Experts suggest a "sum of parts" EPS target where the combined earnings of RemainCo and NUCO equal or exceed current levels.
- Transaction Timelines:
- Announcement to Close: The average timeline for closing a separation transaction is 9 to 13 months.
- Speed vs. Transformation: While speed is required to reduce ambiguity, experts advise against "clone and go" approaches, advocating instead for parallel mini-transformations to maximize value at closing.
- Leadership and Talent:
- Announcement Timing: Early announcement of the new leadership team (CEO/CFO) is now preferred over the previous decade-old standard of announcing a quarter before roadshows.
- Internal Promotion: Over 80% of NewCo CEOs and over 70% of NewCo CFOs originate from within the existing organization.
- Diversity: There is a strategic push to balance internal institutional knowledge with external hires and increase leadership team diversity.
- Communication Strategy:
- Proactive Engagement: Successful separations require early, frequent, and transparent communication to manage emotional attachments and dispel ambiguity for employees, suppliers, and customers.
- Investor Relations: Treat the NewCo launch similarly to an IPO, utilizing roadshows to migrate shares to a "natural" pure-play shareholder base.
- Future M&A Outlook:
- Shrink to Grow: Separations are increasingly used to optimize individual business units for growth that is difficult to achieve within a diversified conglomerate.
- Post-M&A Divestitures: Acquirers are more frequently announcing the divestiture of non-strategic portfolio parts immediately following regular M&A deals.
- Change of Control: There is a higher incidence of change-of-control transactions for both RemainCos and NewCos compared to the broader market.
- Bolt-on M&A: NewCos utilize their independent equity currency to pursue bolt-on acquisitions; historically, 45% of NewCo capital was deployed into organic and inorganic investments.
- RemainCo Capital Return: Historically, 67% of capital returned to shareholders by RemainCos is now being advocated for reinvestment into acquisitions.
- C-Suite Turnover: Average executive tenure is shortening (approx. 4 years for CFOs/COOs/CIOs), accelerating the need for rapid execution of M&A and investment cycles.