Corporate splits and the spin cycle

As the financial cycle slides from late summer into autumn in the northern hemisphere, optimism turns to fear. Stretched valuations deter M&A. High multiples and patchier earnings make flotations harder to accomplish. The shortage of conventional opportunities has stoked enthusiasm for corporate breakups, demergers in particular.

Thyssenkrupp, Prudential and Siemens are among the big European businesses splitting off divisions.

How justified is market enthusiasm for such splits? Some recent examples should raise questions for longterm investors, whose support activists need. Almost 1,000 companies globally were targeted by activists in 2018. Divestments or spin-offs were called for in a quarter of the cases of European activism.

A 2018 study from S&P Global suggests spun-off companies do outperform. Businesses within the same industry as the parent generated impressive cumulative outperformance of almost 30% over a three-year period. However, parent businesses typically produced returns that lagged behind the market by 10%.

CBS and Philip Morris both split off large divisions more than a decade ago.

Lex calculates shareholders have lost £50bn in inflation-adjusted market value since the initial splits. Investors paid $55m to advisers to split Philip Morris. They were loath to shell out fees, estimated at $200m by Dealogic, to stitch it back together.

Shareholders in large European groups should weigh calls for demergers and disposals with equal scepticism. If these do not create long-term value, they are no better than short-term asset shuffling. /London, October 17 © The Financial Times Limited, 2019