Academic journal article The McKinsey Quarterly

Is It Time to Spin off? (Checklist)

Academic journal article The McKinsey Quarterly

Is It Time to Spin off? (Checklist)

Article excerpt

Spin-offs, equity carve-outs, and initial public offerings have slowed down from their heyday in the 1990s, but these transactions will surely come into vogue again, since they can create lasting value when done right. Nonetheless, of 146 restructurings we examined, a majority fell short of average market returns over a 36-month period. (1) Our study suggests that companies seeking to profit only from differentials in market valuations overtime, without regard for a transaction's broader strategic logic, usually lost. What distinguishes winners? With this checklist, managers can assess the three dimensions of performance-strategic, organizational, and financial-that are crucial to success, thus weighing restructuring's full benefits and costs.

Paul Reiner is an alumnus of the San Francisco office, and Alberto Torres is a principal in the Silicon Valley office.

(1.)We analyzed all spin-offs and carve-outs of nonfinancial institutions (from 1988 to 1996) in which the revenue of the parent company exceeded $200 million; these results were compared with S&P 500 returns.

RELATED ARTICLE: If a spin-off will improve a company's long-term performance, executives should be able to check off seven or more of these statements-and provide evidence for each.

Strategic

* Separation would increase the level of managerial focus on the business to be spun off (for instance, a subsidiary contributing less than 10 percent of the parent's profits likely would receive more attention if it were independent). …

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