Corporate division generates problematic quotients
05/02/2025 13:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, Feb 4 (Reuters Breakingviews) - Simplicity is
hard. For all the breezy and cavalier rhetoric that pushy
investors, bankers and CEOs use to tout the benefits of breaking
up companies, such efforts often fail to generate the
anticipated or promised results. With a fresh wave of spinoffs
in the works, it’s a good time to brush up on some harsh
financial realities.
Whether for reasons related to ego, pay or simplistic
growth, most bosses want to enlarge their empires, not shrink
them. It’s also usually easier to buy a peer and hack out costs
than it is to extract a business already tangled up inside a
bigger enterprise. Although conglomerates have fallen out of
favor, the ability to create value over the long term by
splitting them into more narrowly focused operations sounds as
dubious as the notion of one plus one making three in an
acquisition.
There are plenty of historic examples for the latest crop of
cleavers to consider. Over the past decade, CEOs worldwide have
unveiled nearly $1.7 trillion of spinoffs and similar
separations, where a unit started trading independently with a
market capitalization of at least $1 billion. That’s according
to Dealogic data which excludes divisional sales to corporate or
private equity buyers. And plenty more are being teed up. Common
rationales include streamlining operations, helping bosses
focus, highlighting faster growing or more profitable divisions,
and taking advantage of valuation discrepancies.
Pork producer WH Group 0288.HK last week spun off its
U.S.-based Smithfield subsidiary for many of those reasons, as
well as to draw geographic distinctions with its China business.
Holcim HOLN.S , the Swiss building-materials maker, is doing
the same with its North American arm. Cable operator Comcast
CMCSA.O plans to create a new publicly traded company for a
stable of networks including CNBC, while diversified
manufacturer Honeywell International HON.O faces pressure from
aggressive shareholder Elliott Investment Management to sever
aerospace and defense from industrial automation. DuPont, the
chemicals company that already divided itself into three units
under Ed Breen’s stewardship, intends to splinter yet again.
The logic of such moves often sounds compelling, but the
outcomes are mixed at best. Separations led to a blended excess
return about 6% higher than for their respective sector indices,
research conducted by Goldman Sachs and consultancy EY found.
Morgan Stanley strategists discovered, after studying some 400
deals over two decades, that parent companies underperformed the
market by about 8% and the spinoffs outperformed by more than
10%. It’s questionable, however, whether two years, which both
Morgan Stanley and Goldman use as their cutoff point, is enough
time to judge the performance. Since its 2015 debut, the S&P
U.S. Spin-off Index has lagged the S&P 500 Index .SPX .
Further analysis, conducted by Breakingviews, presents
additional cause for skepticism. The sample covered 60 chunky
U.S. examples since 2015 where both parent and SpinCo are still
publicly listed. More than a third of the time, one of the two
companies has generated a negative total shareholder return,
after factoring in reinvested dividends. In eight cases, both
destroyed value following a split, as has occurred with Xerox
XRX.O and Conduent CNDT.O since they separated in 2017 and
Bath & Body Works BBWI.N and Victoria’s Secret VSCO.N since
2021.
Even some of the seemingly strong stories are inconsistent.
For example, after e-commerce giant eBay EBAY.O capitulated in
mid-2015 to billionaire investor Carl Icahn’s demand that it
spin off PayPal PYPL.O , both companies trounced the broader
market’s returns over the ensuing five years. The outperformance
vanished, and then some, in the near decade through January,
however. Hewlett Packard’s split in the same year as eBay’s
represents a rare instance of both companies keeping up with the
S&P 500 Index.
Despite the patchy results, aggressive hedge funds routinely
turn to the breakup chapter in their playbooks to target
corporate sprawl. Most recently, Elliott put $5 billion into
Honeywell, the single biggest investment in its nearly
five-decade history, as part of a campaign to convince boss
Vimal Kapur to split the company. As part of its pitch
projecting an up to 75% share-price boost over two years, the
firm cherry-picked examples such as General Electric GE.N and
United Technologies, now called RTX RTX.N , and “countless
others that have found success through simplification.”
It’s fair to say that the breakups at GE and United
Technologies have served shareholders well so far. The duo also
capitalized on big uplifts in demand and valuation multiples for
power providers like GE Vernova GEV.N and cooling-system
installers such as Carrier Global CARR.N . Those conditions are
hard to replicate, especially considering how long it often
takes to pull apart the various components. Moreover, GE’s
healthcare arm has generated lower returns than the S&P 500, as
has RTX’s separated elevator business, Otis Worldwide OTIS.N .
Like the conglomerates themselves, it takes many smoothly
moving parts to get a split right. They include the respective
capital structures, management, division of assets and customer
experiences. Finding the right fund managers and brokers to
cover the two pieces can also be make or break. The prospect of
a corporate cleanup always holds appeal, but it’s often hard to
cut clearly through the spin.
Follow @jgfarb on X
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Spinoff stocks have lagged the broader market https://reut.rs/40CPPWs
Split decisions: spinoffs deliver patchy returns https://reut.rs/3WJPGzi
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(Editing by Liam Proud and Pranav Kiran)
((For previous columns by the author, Reuters customers can
click on GOLDFARB/
jeffrey.goldfarb@thomsonreuters.com))