New research indicates that well-executed splits can lead to an excess blended return of roughly 6% over the respective sector indexes for two years after the transaction closes.
Corporate separation activity is growing at an outsized pace, with more than 30 separations announced globally in 2022 alone, representing about 17% of announced separations in the past decade. This is among the findings of research published in May by EY and Goldman Sachs. The authors of Strategies for Successful Corporate Separations attribute the rise in separations to financial market uncertainty, challenging operating conditions, competition and the end of a decade of low-cost capital.
According to the research, separations—when executed well—can lead to an excess blended return of roughly 6% over the respective sector indexes for two years after the transaction closes. Companies may separate through a spinoff or a subsidiary’s initial public offering (IPO), or “carve-out” followed by a back-end exit. As a result, “The separated business operates as a standalone public entity with its own equity currency and access to capital markets,” the report states. “In the US, these corporate separations are generally structured as tax-efficient spin-offs. Outside the US, they tend to be structured as demergers.”
While these separation transactions are typically agnostic with respect to size, industry and geography, the industrials and health care industries represented about 50% of globally announced separations in 2022. Corporate separations also got larger, with almost half of the transactions that closed between 2018 and 2022 valued at more than $5 billion, compared with just a third at that value between 2012 and 2017.
The study of 160 transactions indicates that non-US transactions outperform, with an excess total shareholder return of approximately 3%. Given the recent popularity of non-US separations, the report’s authors forecast continued increases in transaction volume outside the US. A separate EY CEO Outlook Survey supports this. The authors state that “48% of global CEOs expect to actively pursue a divestment, spin or IPO” over the next year.
The philosophy that “bigger is better” was embraced by companies after the global financial crisis and drove nearly a decade of megamerger activity and portfolio diversification, making today’s corporate portfolios as complex as ever. Today, about two-thirds of S&P 500 companies have three or more business segments with over $500 million in revenue.