The Business Times
This article originally appeared in The Business Times.
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.