Shrinking to grow: Creating value through spin-offs
Barclays’ M&A Structuring team analysed 100+ large spin-offs to uncover the factors that can result in long-term value for both Parent companies and SpinCos.
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Despite the current environment, M&A market participants are increasingly poised to go on the offensive. Live deal flow may have decreased, yet conversations about potential opportunities have not.
It is a “buyer friendly” market for strategic buyers and sponsors with cash or easier access to capital markets, driven by several factors:
- Fewer players in the M&A arena currently positioned to go on 'offense';
- Less competition from initial public offerings for private companies;
- Lower equity valuations for many potential targets;
- Continuing market support for smart, strategic deals.
Additionally, larger, sophisticated financial sponsors remain poised to invest in corporate carve-outs as well as deals to take public companies private, using more equity and more creative capital structures than traditional leveraged buyouts.
Activist investors are becoming increasingly aggressive as softer stock prices leave companies vulnerable to operational and strategic challenges. Approximately 35% of 2022 activist campaigns had an M&A element or demand to them (i.e. whole company sale, break-up, divestiture, activism against a sale).1
Source: Activist Insight, 13D Monitor. Includes US companies with market cap greater than $250mm.
Activists are fundamentally value investors. They target companies they believe to be trading for less than their intrinsic value and push for changes that will improve valuations. This could mean a shift in operations, strategy or management, or a push for commitments to Environmental, Social or Governance (ESG) initiatives. Lower market valuations create a broader set of attractive opportunities for activists.
In addition to more favourable market conditions for activists, new universal proxy rules reduce the costs and complexities of running campaigns, increasing the risk that smaller, less-experienced activist funds will seek board seats at targeted companies.
Activists often work to longer time horizons than market cycles. As a result, activists seeking to force strategic mergers could take positions in companies now and wait for the M&A market to improve later.
1 Activist Insight, 13D Monitor
The strong dollar has put US companies in a good position to acquire listed companies in the UK and Europe, particularly those with significant revenues in US dollars.
Cross-border activity may flow in the other direction as well. Many European companies are likely to refocus their operations and assets away from China and Russia towards the US for better stability given current geopolitical dynamics. By acquiring US assets, UK and European companies can also benefit from the relatively stronger US economy and lower energy US input prices.
Ongoing market and geopolitical uncertainty is also causing many companies to reassess their corporate strategies as well as their business portfolios. For this reason, actvity in tax-free, corporate spin-offs will likely continue unabated.
Since 2017, companies have announced more than 200 strategic separations, and currently there are 11 pending spins by US listed parent companies with a market cap greater than $11 billion.2
2Pending spins for US listed companies as of 2/14/2023 with parent market cap ≥ $1bn.
Barclays’ M&A Structuring team analysed 100+ large spin-offs to uncover the factors that can result in long-term value for both Parent companies and SpinCos.
Source: US tax-free spins with parent market cap ≥ $1bn. Trailing 12-Month period as of 2/13/2023. Rationales based on details in transaction announcement.
Since they do not require a counterparty, spin-offs have low execution risk, even in challenging market environments. The opportunity to bring enhanced shareholder value, management focus, strategic flexibility and tailored capital structures makes spin-offs especially attractive in the current environment.
Expect activity to remain slow for the first half of 2023, as markets stabilise and interest rates level. Spin-offs, cross-border deals, increased activism, and a wider field of smart, strategic deals are all likely to see greater focus ahead of an anticipated snapback in M&A activity later in the year.
About the expert
Gary Posternack
Global Co-Head of M&A
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