The Edge Markets

Sometimes Companies Need to Break Up Too

Corporate break-ups may be in vogue, but are they worth it?

By Andy Pasternak, Jim Wininger and Satish Shankar

Published on February 25, 2015
min read


This article originally appeared in The Edge Markets. Is it time to split up? Each week brings with it news of the latest multi-business public company looking to ignite shareholder returns by separating. Sometimes compelled by external pressure from activist investment funds, spin-offs are taking place across a range of industries. HP Inc and Hewlett-Packard Enterprise, eBay and PayPal are among the most recent examples, and the list keeps growing. Corporate break-ups may be in vogue, but are they worth it? Separations are costly; one-time costs typically amount to 1% to 2% of revenue, and sometimes more for the most complex separations. They are time-consuming, too, generally taking 12 to 18 months from decision to close. As anyone who has embarked on a separation can attest, they are also resource intensive and distracting for an organisation, causing a high degree of inward focus. The big question for boards and CEOs pondering such a move is, “Does the breakup succeed in creating shareholder value?” The answer is, “sometimes”. We determined this by analysing the performance 18 months post-separation of 40 transactions involving companies valued at more than US$1 billion in the 2001 to 2010 time frame. We focused on deals in which two separate public companies were formed out of a portfolio in which there had been some level of strategic and operational integration. *Read more at The Edge Markets.*

This article originally appeared in The Edge Markets.

Is it time to split up?

Each week brings with it news of the latest multi-business public company looking to ignite shareholder returns by separating. Sometimes compelled by external pressure from activist investment funds, spin-offs are taking place across a range of industries.

HP Inc and Hewlett-Packard Enterprise, eBay and PayPal are among the most recent examples, and the list keeps growing.

Corporate break-ups may be in vogue, but are they worth it? Separations are costly; one-time costs typically amount to 1% to 2% of revenue, and sometimes more for the most complex separations. They are time-consuming, too, generally taking 12 to 18 months from decision to close. As anyone who has embarked on a separation can attest, they are also resource intensive and distracting for an organisation, causing a high degree of inward focus.

The big question for boards and CEOs pondering such a move is, “Does the breakup succeed in creating shareholder value?” The answer is, “sometimes”. We determined this by analysing the performance 18 months post-separation of 40 transactions involving companies valued at more than US$1 billion in the 2001 to 2010 time frame. We focused on deals in which two separate public companies were formed out of a portfolio in which there had been some level of strategic and operational integration.

Read more at The Edge Markets.