The prevailing belief these days is that bigger is better. But despite that, there are signs this could be a record year for spin-offs, led by Kraft Foods's spin-off of its North American grocery unit and ConocoPhillips's spin-off of its downstream businesses.
"It takes courage to break up a company. CEOs and boards of directors often fear that investors will view asset divestitures as admissions of failed strategy - that having certain businesses under the same corporate umbrella never made sense.
"Many worry that shedding assets will cost a company the benefits of scale, cut into the advantages of analyst coverage, or even damage employee morale. Spin-offs in particular draw scrutiny because they shrink the size of the parent company but, unlike sales, don't generate cash to reinvest," McKinsey & Co.'s Bill Huyett and Tim Koller write in The McKinsey Quarterly.
They say a misperception is that spin-offs can be quick fixes to low stock-price valuations. Usually the analysis that suggests the company is worth more than the sum of its parts proves flawed, since comparable businesses haven't been identified.
But spin-offs can be valuable because of expectations by the market that performance will increase at both the parent company and the spun-off business once each has the freedom to change its own strategies, people and organization. Indeed, they report that of the 85 spin-offs associated with a major restructuring of a company globally since 1992, spun-off businesses nearly doubled their growth rates and increased their operating profit margins by a median of 1.6 per cent over five years.
Harvey Schachter