Interview, Podcast
Breaking Free: The rise of corporate separations
- Corporate sentiment is shifting from portfolio diversification and complexity toward simplification and enhanced focus, driven by a strategic environment where the cost of capital has moved from near-zero to elevated levels, rendering "growth at any cost" no longer the priority.
- Strategic reviews and corporate separations are currently most prevalent in diversified pharmaceuticals and industrial products but are expected to expand into technology, consumer products, and global markets, with the average timeline from announcement to closing ranging from nine to 13 months.
- Transaction success is measured at the end of a two-year period, coinciding with the average duration of transition service agreements, with expectations that separated entities will on average outperform the S&P 500 sector index by mid-single digits.
- The two-year measurement horizon correlates NewCo outperformance primarily to revenue growth, a focus area where management teams are urged to execute "several mini transformations" in parallel to ensure readiness before the transaction closes.
- Leadership strategies recommend announcing management teams decisively and early rather than waiting until the quarter before roadshows, with over 80% of NewCo CEOs and over 70% of CFOs expected to be internal appointments, though advocates support balancing this with new talent and increased diversity.
- A "shrink to grow" thesis is anticipated to help companies optimize and grow separated business units, with increased activity in change of control transactions and bolt-on acquisitions enabled by independent equity currency.
- Capital allocation plans are expected to accelerate due to rapid C-suite turnover, characterized by an average tenure of about four years for CFOs, COOs, and CIOs, compared to seven to eight years for CEOs.
- Historical data indicates RemainCos returned 67% of capital to shareholders while NewCos used 45% for organic and inorganic investments, with advocates suggesting these capital streams be increasingly directed toward acquisitions and investment rather than pure returns.