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![]() ![]() Spin-offs offer similar tax advantages to parent shareholders, who receive valuable shares in a new public company without recognizing a taxable gain. Moreover, the parent company may be able to bolster its balance sheet through a cash distribution to the parent before the spinoff (up to the level of its tax basis) and by issuing new debt of the spin-off company in exchange for existing debt owed by the parent. In situations where the parent’s tax basis in the separated business is low (and there would thus be a large taxable gain) but valuations are not robust enough to compensate for the tax burden, the tax-free nature of a spin-off alone may lead the parent to favor that form of transaction. One of the chief advantages to the parent company of a spin-off, where a new public company is created around a business line or asset, is that the transaction does not entail any tax liability to the parent, as a straight sale to a buyer typically would. However, the upside must be weighed against one-time transaction costs and cost dis-synergies stemming from maintaining separate corporate infrastructures and loss of scale. ![]() Why Pursue a Spin-Off Transaction to Unlock Value?īoard analysis of a spin-off, like any other proposed transaction, begins with the value proposition.įrom a corporate growth perspective, spin-offs can improve returns by better aligning pay and performance for businesses leaders, providing equity currency for future transactions that is more closely linked to the characteristics of each business, and focusing management on improving organic business performance and growth. If well designed, these can not only unlock value for shareholders, but leave the company with flexibility regarding the final structure, so they can pivot along the way in response to input from shareholders or changing market conditions. Another factor is increased shareholder activism in response to the uncertain outlook for corporate performance due to macro-economic factors like higher interest rates, inflation and hampered demand.Īs boards and management teams evaluate business portfolios and potential separation transactions, they confront an M&A environment in which carve-out sales face headwinds, including mismatches between buyer and seller valuation expectations, increased financing costs due to higher interest rates and market dislocation, uncertainty around the macro-economic outlook and increasingly aggressive regulatory reviews.įaced with such an uncertain environment, boards and management teams contemplating separations would be well-advised to consider carefully spin-off and similar transactions like Morris Trusts, Reverse Morris Trusts, split-offs and incubator joint ventures - transactions we will refer to collectively as spin-offs. ![]() One catalyst is the capital markets, where equity multiples generally have declined but growth sectors and businesses with predictable cashflows sometimes command premiums. ![]() spin-off transactions in 2022.Īs 2023 unfolds, boards and management can anticipate even more calls to “unlock value” by separation. Separation transactions find their way onto board agendas at the behest of both long-term institutional investors searching for “pure play” opportunities and activist investors, who initiated seven proxy campaigns centered around corporate break-ups in the third quarter of 2022 alone.Īgainst this backdrop, companies have responded with an increasing number of separation transactions, announcing $2.3 trillion of carve-outs globally in 2021 and more than 30 significant U.S. In recent years, in the boardrooms of public companies with multi-line businesses, there have been few louder drum beats than those from investors calling for divestitures, spin-offs or other separation transactions aimed at increasing “corporate clarity.” Spin-offs are less dependent on third parties and market conditions, so the company has more control over the timing of a separation, which helps to unlock value on the company’s chosen timeframe.Tax-free spin-offs and similar transactions may be the most appealing way to separate a business, in part because companies retain flexibility during the process to change the structure of the transaction, and they can entertain third-party bids while pursuing a spin-off.Companies are likely to see continued pressure from both institutional investors and activists to separate businesses that are not deemed “core” and thereby generate higher equity multiples for the parent or the separated business. ![]()
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