Watch Them Spin!
Posted on 6/29/2012, by Mark Ginestro
The leaders in this environment will be the companies who prepare themselves for potential corporate portfolio changes and can execute creative strategies quickly.
After reading about yet another corporate spin-off plan in News Corp following the news about Dole also considering spinning off part of its business, I felt compelled to write about what’s driving this. To be clear, the activity is definitely up. Sara Lee, Kraft, and Abbott are just a few more examples of large companies executing divestiture strategies. So why are all of these companies evaluating their business portfolios now?
It really is coming down to market valuations and the current equity environment. Board of Directors and CEOs are justifiably looking to maximize shareholder value. Markets are stagnant at best so executives cannot rely on being rewarded with increased stock performance even when their profits are up. Executives are arguing that their business performance is good and this should be reflected in the stock price, but this definitely isn’t the case. In the current environment, executives are looking for more creative ways to realize shareholder value and, in doing so, are assessing their portfolio of businesses. In particular, they look at divestitures as a way to improve shareholder value. To illustrate further, Dole has a solid $1B+ packaged goods business in their portfolio with a great brand. Dole’s current market capitalization is under $1B, but, based on current metrics, the CPG business alone could easily beat that as a stand-alone company. They may get much more than that from another acquisitive CPG company. With CEOs and Boards getting increased pressure from shareholders on stock price and bankers hounding them with valuation options, portfolio analysis is heavy right now.
Activity for spinning out divisions and acquiring divisions of other companies will continue to be aggressive until the equity markets become more rewarding for solid company performance. The leaders in this environment will be the companies who prepare themselves for potential corporate portfolio changes and can execute creative strategies quickly. In my most recent paper Build an Effective Merger, Acquisition & Divestiture Execution Capability: Are You Ready for Your Company’s Next Deal?, I outline the unique considerations companies should address when pursuing divestitures, as well as mergers and acquisitions. With this increased movement in the marketplace, how equipped are you to execute these types of deals?