309. Five key moves to create value in spinoffs

So Jamie, let's set the scene.

With so much uncertainty in today's macro environment, why is now the time to talk about divestitures and specifically spinoffs? Are you still seeing these types of transactions despite this uncertainty? And if yes, what's driving them?

Of course.

It's a great question, Sean.

I actually think these moments of uncertainty when growth is a little bit harder to find are when executive teams and boards tend to turn inwards and look at their existing portfolio to seek out where they have bright spots and pockets of incremental growth.

But that also leads to looking where parts of the business are perhaps hamstrung within the existing portfolio or have opportunities to create more value, uh, in a different way, perhaps outside of the company's portfolio.

And so I think as we, we look at the announcements over the past 12 months, there's been quite a lot of spinoffs announced.

Uh, there are a lot going on at the moment, and I think from conversations Anna and I are having, there are a lot that are also being contemplated.

When we look at why executives and companies, um, announce spinoffs, when we review sort of the public disclosures of, of plans to spin, we do consistently th- see three reasons cited, which are the opportunity to have a more focused strategy for the spinoff asset as well as for remain co with management more directly involved in a sorta narrower business model.

We also see cited frequently the opportunity to have a more fit for purpose operating model.

Different businesses need different functions, different capabilities, different priorities in terms of how large or small those capabilities are.

And by going into independent businesses, spinoff and, and the remaining business, you have the opportunity to have a more tailored model.

And lastly, executives often cite the ability to better manage capital.

You have businesses that have different costs of capital, have different investment needs, might wanna pursue M&A opportunities that otherwise don't make sense.

As much as that's what's, um, talked about and announced and as prevalent in spinoffs are year to year, unfortunately, the research has shown more recently that not all spins are creating value, and that was one of the key insights that we learned over the past five years.

There is a struggle in delivering the full potential in the original deal thesis.

We see only about 50% of spinoffs actually deliver excess TSR, which y- we measure that by comparing to, uh, the sector that spinko and remain co are in and how the TSR performance is relative to the sector.

And a combi- on a combined basis, unfortunately, over the past decade, the median performance has actually been, uh, slightly negative, which compares to the sort of first decade of the 2000s where it was more positive.

And that has really led us to unpacking what the difference is between those that perform well and those that have struggled to deliver that original deal thesis and the, the value.

And those are the lessons that we wanted to talk a bit about today.

So if only 50% of spinoffs are actually creating excess shareholder value, the flip side is that 50% are creating less than they should.

Are you seeing specific macro trends that are making it harder to generate those excess returns from a spin?

I think the macro trends that we see impacting spinoffs tend to be the same that impact overall business performance across industries.

Uh, frankly, the key lesson on spins is it's all about growth and margin, the same way it's about growth and margin [chuckles] for every business that's a public company or, or a private company.

And when you do a spinoff, there isn't a magic Unlock, you need to do all of the activities that you otherwise need to do to accelerate growth and improve margin.

So Jamie, let's set the scene.

With so much uncertainty in today's macro environment, why is now the time to talk about divestitures and specifically spinoffs? Are you still seeing these types of transactions despite this uncertainty? And if yes, what's driving them?

Of course.

It's a great question, Sean.

I actually think these moments of uncertainty when growth is a little bit harder to find are when executive teams and boards tend to turn inwards and look at their existing portfolio to seek out where they have bright spots and pockets of incremental growth.

But that also leads to looking where parts of the business are perhaps hamstrung within the existing portfolio or have opportunities to create more value, uh, in a different way, perhaps outside of the company's portfolio.

And so I think as we, we look at the announcements over the past 12 months, there's been quite a lot of spinoffs announced.

Uh, there are a lot going on at the moment, and I think from conversations Anna and I are having, there are a lot that are also being contemplated.

When we look at why executives and companies, um, announce spinoffs, when we review sort of the public disclosures of, of plans to spin, we do consistently th- see three reasons cited, which are the opportunity to have a more focused strategy for the spinoff asset as well as for remain co with management more directly involved in a sorta narrower business model.

We also see cited frequently the opportunity to have a more fit for purpose operating model.

Different businesses need different functions, different capabilities, different priorities in terms of how large or small those capabilities are.

And by going into independent businesses, spinoff and, and the remaining business, you have the opportunity to have a more tailored model.

And lastly, executives often cite the ability to better manage capital.

You have businesses that have different costs of capital, have different investment needs, might wanna pursue M&A opportunities that otherwise don't make sense.

As much as that's what's, um, talked about and announced and as prevalent in spinoffs are year to year, unfortunately, the research has shown more recently that not all spins are creating value, and that was one of the key insights that we learned over the past five years.

There is a struggle in delivering the full potential in the original deal thesis.

We see only about 50% of spinoffs actually deliver excess TSR, which y- we measure that by comparing to, uh, the sector that spinko and remain co are in and how the TSR performance is relative to the sector.

And a combi- on a combined basis, unfortunately, over the past decade, the median performance has actually been, uh, slightly negative, which compares to the sort of first decade of the 2000s where it was more positive.

And that has really led us to unpacking what the difference is between those that perform well and those that have struggled to deliver that original deal thesis and the, the value.

And those are the lessons that we wanted to talk a bit about today.

So if only 50% of spinoffs are actually creating excess shareholder value, the flip side is that 50% are creating less than they should.

Are you seeing specific macro trends that are making it harder to generate those excess returns from a spin?

I think the macro trends that we see impacting spinoffs tend to be the same that impact overall business performance across industries.

Uh, frankly, the key lesson on spins is it's all about growth and margin, the same way it's about growth and margin [chuckles] for every business that's a public company or, or a private company.

And when you do a spinoff, there isn't a magic Unlock, you need to do all of the activities that you otherwise need to do to accelerate growth and improve margin.