March 28, 2018
There is often talk about a valuation discount embedded into companies with multiple businesses. The argument is that a separation or spinning-off of businesses will help companies unlock this discount thereby increasing their value to shareholders. Our research shows that although spin-offs can be an attractive move for some companies, they do not automatically unlock value. The success of a spin lies in how the spun-off entity and the parent company are able to improve their execution as stand-alone entities.
Sometimes when it seems too good to be true, evaluate if it is
We analyzed the effectiveness of spin-offs by looking at a large sample of spin-offs over the past 20 years. We observed the short and long-term impact of the spins on the stock price of both the parent company and the spun-off entity. Our research shows that not all spin-offs unlock value for shareholders. While there are a number of spin-offs that are successful in creating value, on average most spin-offs tend to be at best value neutral for shareholders.
Our observations, shown below, indicate that there is a wide distribution in performance. There are some successful spins as well as some not so successful ones. From our research, we identified what makes a successful spin and what companies can do to increase their odds of a successful spin-off.
The reality of unlocking value in a spin-off
The value creation from a spin-off lies in how the spun-off company and the parent company are able to improve their execution as stand-alone entities. Large companies often dictate homogeneous action plans to all their businesses that may benefit some of them but can actually harm others. A successful spin-off is one in which the transaction unshackles the new independent business from those corporate mandates enabling it to operate more efficiently. Some of the changes spun-off entities can enjoy are more focused management, attract better talent, eliminate conflicts of interests, improve capital allocation and drive a clear and cohesive strategy.
Proposed steps to maximize value in a spin-off
- Step one: Define spin-off strategy through a value lens – When defining spin-off strategy, it is essential to first understand how the different business segments within the organization contribute to overall value. At PwC, we use the Portfolio Value Analysis approach, using the most granular information generated by the segments, to help companies understand the sum of the parts value of their business bottoms up. Then we identify the key drivers of value for each of the segments and finally we identify which segments could be potential candidates for a spin-off. Those would be the segments that would be able to unlock more value if operated as stand-alone entities.
- Step two: Establish a pre-spin value capture roadmap – Once you identify the ideal business to spin-off, the second step to enhance value capture is to identify ways to improve performance and establish a well-defined value creation roadmap. Revenue growth, capital efficiency and margin improvement are typically the key levers of value. Look for ways to find the balance between optimization and growth and create an operational improvement plan six to eight months before spinning-off the business. Identified specific value enhancing opportunities will allow managers to visualize the roadmap for improvement. A clear roadmap including a cohesive strategy of how the spin-off will create value and what metrics need to be focused on is the best guarantee that it will be accretive to shareholders.
Managing the spin-off through the value lens
It’s never too early to get started, if you are considering a spin-off. Proactive planning versus reactionary response can make the difference in determining the success of the spin-off in terms of driving shareholder value.
With years of real life experience helping hundreds of clients, PwC can provide you divestiture strategy, industry insight and value consulting advice through all phases of the spin-off process, both from a strategic and tactical perspective. We can help you conduct the detailed granular level analysis on your portfolio to understand where value is being created and provide a roadmap for value maximization.