De-Mergers: Defining Corporate Break-Ups

Originally published on JohnJellinek.com

Bigger isn’t always better, and that’s a principle that more and more businesses are beginning to understand. The evidence is in the numbers. 2015 saw corporate spin-offs valued at a quarter of a trillion dollars. That’s double what the number was in the year prior. And while a corporate break-up isn’t going to be the right choice for any business, it does come with a number of advantages.

First comes the truth that sometimes developing departments in a corporation are best served by moving in different directions. A department that isn’t growing at the same rate can be split off, allowing it to develop at its own pace without being a drag on its parent company, and the differing values of these two corporations can benefit greatly by implementing new management policies where each gets the right specialists in positions of power without being at odds with one another. This can also allow the smaller company to get the attention it needs without being overshadowed by its parent company.

While spinning off a company can be one of the best ways to maximize the value of all your resources, it’s not the only option. Sometimes simply selling off a subsidiary is the right choice, and a sell off doesn’t have to be initiated by concerns of a failing business. A subsidiary may be predicted on the best idea in the world, but if you don’t have the resources or expertise to properly manage it, it could quickly become dead weight, and the influx of cash and freedom that the parent company receives from the sell-off could be a far better alternative to holding onto a subsidiary that you can’t properly nurture.

Then, there are equity carve-outs. This is a situation that basically splits the difference between a spin-off and a sell-off. In these situations, the subsidiary is sold off to new shareholders but the parent company still holds a level of control in operations. It’s a good choice for subsidiaries that outperform their parent organization.

The final option for a corporate break-up is tracking stocks, and that’s a bit more complicated. In situations like these, the segments of the company are tracked differently, allowing each segment to be properly evaluated even when there’s a discrepancy between growth. This allows infrastructure to be shared between all of the segments without hurting the valuation of the company.