Strategies for successful corporate separations

Corporate separation strategies like carve outs are complex but can be a catalyst for transformation and growth.

Following the global financial crisis, companies embraced the bigger is better philosophy by diversifying their portfolios, engaging in mega-merger activities throughout the past decade. This resulted in today’s complex corporate portfolios where approximately two-thirds of companies listed on the S&P 500 have three or more business segments with over $500 million in revenue.

However, recent financial market uncertainty, coupled with challenging operating conditions and high interest rates, has led companies to re-evaluate their portfolios and pursue corporate separations to position their businesses for success. Markets are increasingly valuing companies that “shrink to grow” and focus on their core businesses. Increased separation activity is evident across all industries, especially industrials and health care.

Corporate separations are complex but can generate significant shareholder value and, in many cases, outperform the market. We measure the success of separations in terms of total shareholder return across the two resulting businesses, RemainCo and NewCo. Our analysis shows that when corporate separations are executed well, they can lead to an excess blended return of roughly 6% from announcement to two years post-close as compared with their respective company’s sector index.

While long-term outperformance is not guaranteed, the strategic vision and decisions executives make pre-separation are critical. There are five areas where companies will want to focus their efforts to maximize long-term value for shareholders.

Overall, corporate separations continue to be a preferred lever to unlock value in any industry. The recent uptick in such transactions reflects an acknowledgement of the outperformance from recent corporate separations as well as an effective way to circumvent tumultuous buyer and market conditions. Executives that understand the time and cost involved and who can build consensus with their strategic vision are well-prepared to embark on the separation journey.

Summary

By using separation strategies like carve outs as a catalyst for transformation, companies can greatly increase the odds of creating long-term value and outperforming in the market. Download the full report to discover why the market is rewarding the shrink-to-grow model.