Company chiefs look to divide and rule
By Alison Smith and Helen Thomas
Ed Breen, Tyco International chairman and chief executive, was setting out the group’s plans to split. The three new entities would “be able to move faster and more aggressively … by pursuing their own growth strategies as independent companies,” he said.
That was back in January 2006. This week, he was offering a similar explanation for the industrial group’s plans to do a further three-way separation.
He joins the procession of US executives explaining why they intend to divide their corporate empires.
Since mid-July, these companies have included media conglomerate McGraw-Hill; Kraft Foods; and oil group ConocoPhillips which said it would demerge its refining and marketing operation.
One reason why demergers are popular is that they often result in a strong share price performance.
A wealth of academic research supports this assertion, even though studies may disagree as to the cause – variously citing factors such as more powerful incentives and greater freedom for
management teams; higher valuations because equity markets prefer pure play companies; and the premium that comes from the prospect that spin-offs can more readily be taken over.
The US tax regime has long meant that a properly-structured spin-off can be a tax-free way to streamline a group. But additional factors lie behind the fashion for splits.
Some people see the financial crisis of 2008-09 as a prompt. Bill Huyett, a partner at consulting firm McKinsey, says it “triggered a more fundamental look by corporate boards at what businesses they owned and why they owned them”.
Joe Cornell, who runs Spin-Off Advisors, believes the crisis had an effect. “When the market collapsed, there were a lot of spin-offs that had not yet been announced that were shelved then and are coming through now”.
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