Disaggregation strategies are coming in favor as investors find that high-growth divisions are commanding higher valuation multiples once separated from their stable earnings low-growth spouses. Simply put, the market cap of A+B is exceeding that of AB.
This article analyzes disaggregation strategies and the different forms they can take in a deal.
One common approach discussed by the authors involves spinning off a piece of the company into a stand-alone legal entity and then distributing that new entity to the pre-spin company’s shareholders – the spin-off approach. This approach can be driven by a proactive board or result from the work of shareholder activists.
While fairly well tested, the spin-off approach still bears execution risks given the interpersonal relationships at the heart of the deal.
Operationally, many businesses have back-office consolidation for certain functions such as treasury or research and development. These cost centers provide coverage to all operating units. Unraveling such bonds can be a challenge.
Typically, the spin-off company and the original parent company will make adjustments to their respective capital structures concurrent with the spin-off. These adjustments will often require board consideration, exposing boards to potential claims in situations where new debt is being authorized or special distributions made. Many boards seek third-party assessments when contemplating such adjustments in order to mitigate the risk of claims.
When engaging financial advisors for independent advice, these authors caution against a ‘one size fits all’ application. Boards should seek out independent advisors with relevant operational industry experience that understand the unique economic and regulatory factors at play in the specific industry.
The subtleties of both the spin-off company and the original parent company should be completely understood by a financial advisor preparing a solvency opinion.
With spin-off transactions garnering more attraction from investors, and a deep pool of candidates suitable for a spin-off deal, organizations should strive to be both nimble and rigorous in a market that has demonstrated a willingness to reward execution and punish those who do not.