The Keys to Success in Spinoffs

Corporate restructurings accomplished through spinoffs have long been a key tool for management to unlock shareholdervalue. In 2016, global spinoff volume reached $117 billion, and spinoff activity continues to unfold at a similar pace in 2017, with Hilton, Xerox, Alcoa, Johnson Controls, and Danaher all recently completing major transactions. Spinoffs are often designed to increase strategic focus and discipline in the allocation of capital, enabling companies to respond more effectively to opportunities that create shareholder value, including transformational M&A. And intensifying shareholder activist pressure, along with favorable debt market conditions, has provided significant momentum to spinoff activity. In fact, almost 20% of the companies that announced spinoffs in the past five years were subject to some form of prior activist engagement. Moreover, part of the impetus for such activism can be traced to the record M&A volume of the past few years, which has added to investor demand for many acquisitive companies to consider shedding businesses that are no longer a strategic fit. But even with all this M&A activity, opportunities for unlocking value through spinoffs have not been as abundant or readily identified as in the past owing to the general reduction in corporate business diversification that has taken place during the last decade or so. And perhaps reflecting this development, the average longer-run shareholder returns from spinoffs have actually turned negative during the past five years, while the dispersion of spinoff returns has increased, representing greater downside risk for restructurings undertaken without an effective strategy and rationale for increasing efficiency and value. Nonetheless, more than half of all spinoffs over the past five years have generated share price outperformance despite the overall decline in spinoff performance. The authors devote the second half of the article to identifying several key characteristics of the post-separation entities that indicate the potential for such a restructuring to deliver share price outperformance. The main attributes of value-increasing spinoffs are size and organic growth, and increases in business focus and capital efficiency; but such transactions have also produced companies that maintain the financial flexibility to pursue M&A along with a dividend policy that is both attractive and sustainable.