Your sister has decided her next investment will be in a spin off company. She asks you how much money she can make, but you think that’s the wrong question. She should be asking, do spin offs create or destroy value? You must read this …
Do Spin Offs Create or Destroy Value?
Spin offs can create and can destroy value. They create value through renewed focus, unlocking unrecognized value, positive market sentiment, and adaptability. A spin off can be a value-destroyer through poor execution, synergy loss, strategic misalignment, and an inopportune economic climate. Here are the details:
Value Creator
Renewed Focus – The separation of a subsidiary into an independent entity creates the benefit of renewed focus for the parent firm and the spin off. Each company can concentrate on their growth initiatives and targeted market segments of their core businesses. Renewed focus can increase shareholder value.
Unlocking Unrecognized Value – Spinning off a division from under the shadow of a larger company can unlock hidden value. An entity now trading as a public company has an opportunity for market recognition, resulting in increased shareholder capital appreciation.
Positive Market Sentiment – Spin offs attract the interest and investment dollars of event-driven investors. The heightened positive attention, potentially, can lead to higher valuation boosting shareholder value.
Adaptability – Do spin offs create or destroy value? Adaptability is a value creating attribute. Spin offs tend to be more fiscally agile than their corporate parent firm. This strategic nimbleness allows for quicker actionary and reactionary market decisions, mitigating missed growth opportunities.
Remember, you thought your sister should be asking do spin offs create or destroy value? Her informed investment decision must consider the value destruction potential of spin offs. Let’s look:
Value Destroyer
Poor Execution – Integration missteps, due diligence inadequacies, and unanticipated costs are the advents of poor execution and destroy shareholder value.
Synergy Loss – When projected synergy benefits between the parent firm and spin off do not materialize, mutual value is lost. Value can be further eroded by investor skepticism in the parent firm’s prospects due to lost spin off revenue and the spin off’s maiden voyage into unchartered, independently operated waters.
Strategy Misalignment -Unclear strategic initiatives or missing dedication to a target market creates stagnated progress and destroys value. Management must have a well defined vision and mission and implementation prowess honed through long-term goal realization.
Inopportune Economic Climate – Adverse market conditions and prolonged economic downturns will negatively impact a spin off resulting in loss of value.
Do spin offs create or destroy value? Spin offs have the potential to introduce hidden value to the market but if the separation transaction is poorly executed value will be lost. A spin off can have a focused management team with extensive expertise in their niche market, however, if the subsidiary is spun off during recessionary fears the firm could struggle. Value creation or destruction depends on competent execution, managerial experience, and opportune market timing.
