This piece originally appeared in The Jakarta Globe.
Each month 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, sometimes by regulations, spinoffs are taking place across a range of industries. Consider the case of Indonesian banks spinning off their Shariah banking operations.
Corporate break-ups may be in vogue, but are they worth it? Separations are costly; one-time costs typically amount to 1 percent to 2 percent of revenue, sometimes more for the most complex separations. They’re time-consuming, too, generally taking 12 to 18 months from decision to close. As anyone who has embarked on a separation can attest, they’re also resource-intensive and distracting for an organization, causing a high degree of inward focus.
The big question for boards and CEOs pondering such a move is: “Does the break-up succeed in creating shareholder value?” The answer is: “sometimes”. We determined this by analyzing the performance 18 months post-separation of 40 transactions involving companies valued at more than $1 billion in the 2001 to 2010 timeframe. 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.
Based on our analysis, the top third of separations delivered significant value: The combined market cap of the new businesses after separation exceeded their pre-spin value by more than 50 percent. That’s the good news. But in another one-third of the cases, the combined market cap of the new companies was 40 percent less than their pre-spin value 18 months after separating.
This tells us that separations are “high beta” events, requiring CEOs and boards to thoroughly understand the most important contributors to success and to take a measured approach to spinoffs, even in the face of external pressures from investors.
Andy Pasternak is a partner with Bain & Company’s Chicago office. Jean-Pierre Felenbok and Thomas Olsen are partners in Bain’s Jakarta office.