The market capitalisation of the 44 globally listed parent companies involved in corporate spinoff activity could reach $664bn by the end of 2014, finds new research by investment analysts, The Edge and Deloitte. This is a fivefold increase on $131 billion, the market value of the 32 parents companies that broke up in 2010. This is due to larger companies engaging in spinoffs, as well as higher volumes overall. A spinoff occurs where a division of a public company becomes an independently listed business.
The research Study indicates this increase will continue into 2015, as the market capitalisation of global corporations that have announced spinoffs for next year is already $775 billion.
Ryan Mendy, COO of The Edge Consulting Group, said: "Investors will be surprised to learn that 4 in 10 spinoffs don't generate any value over year one. However, the investment returns we have discovered from the remainder are significant, and the total value of companies announcing global spinoffs has risen steeply since 2000. Combined with our analysis of predicted spinoffs yet to be announced, our research suggests the figure is likely to top $3 trillion by the end of 2016."
George Budden, corporate finance partner at Deloitte, commented: "The high proportion of spinoffs where shareholders receive value, combined with high average returns, is consistent. This strongly supports the inclusion of spinoffs as an important option in a board's armoury."
Worldwide, parent companies generated 14 per cent average returns one year post break up, rising to 28 per cent after two years. This gets interesting when compared to global share price indices that generated 1 per cent* growth over one year. For the spinoff entities, the report reveals the growth returns are even more marked, producing a 22 per cent one year average return post demerger, rising to 48 per cent after two years.
George Budden continued: "Spinoffs are not without risk, and careful assessment of how to shape the business to be spun off is vital at a very early stage in proceedings. A spinoff is significantly more complex to execute than a simple business sale or divestiture. The management team need to be prepared to run a publicly listed business from day one, with all the obligations for reporting and disclosure that entails.
"In addition, there are often many connections between the spinoff and parent company, from systems to property to supply chain, which will need to be separated. The focus on globalisation and improving efficiency over the last decade has increased these dependencies, even between what may appear to be disparate parts of a corporation."
Ryan Mendy concluded: "For both management and investors, the study's 15 years of data also found that spinoff value creation is not dependent on the pace of economic growth and that an increase in analyst coverage had little impact on performance. Conversely, the study reveals precisely which sectors, such as Consumer, Healthcare, Energy and Utilities, have created the greatest returns, as well as uncovering the importance of investment timing for success.
"On the whole, global corporate break-ups represent a frequently misunderstood special opportunity for investment managers as an asset class, if they possess the correct timely analysis recommending which entity could hatch the greatest value for shareholders."
