Spinoffs and Carveouts: Some Factors Leading to Successful Divestiture

By Cristo, Donna A.; Falk, Raymond W. | Competition Forum, July 1, 2006 | Go to article overview

Spinoffs and Carveouts: Some Factors Leading to Successful Divestiture


Cristo, Donna A., Falk, Raymond W., Competition Forum


EXECUTIVE SUMMARY

This paper tests the anecdotal literature related to the reasons that lead to a successful outcome (by reducing failure rate) of corporate divestitures, specifically, spinoffs, carveouts, and carveouts-to-spinoffs. Four variables were tested: 1.) focus industry concentration; 2.) revenue size of parent; 3.) revenue size of spinoff/carveout; and 4.) divestiture reasons. Parent size and revenue size together comprised an unquestionably significant influence on failure rate for these divestitures. Parent size alone and revenue size alone were also unquestionably significant. Therefore, larger parent size and larger revenue size of the divestiture does matter in creating a successful outcome by reducing failure rate. Industry concentration focus and divestiture reasons were significant, but to a lesser extent in comparison to parent size and revenue size.

Keywords: Corporate Divestitures, Spinoffs, Carveouts, Asset Restructuring, Value Creation

INTRODUCTION

Although empirical studies have addressed whether spinoffs and/or carveouts have been successful based on financial performance and survival (see Literature Review), there has been no study that addresses what makes these types of corporate divestitures successful. This paper builds on the existing spinoff and carveout literature by adding possible reasons why some spinoffs and carveouts succeed while others fail. These reasons include: the size of the parent, the size of the divestiture, the reason(s) for the divestiture, and the concentration of the parent before divestiture. Other variables were explored and allowed to interact with these reasons. They included the type of management team, management ownership, type of divestiture, funding and the nature of the technology.

Large organizations need to maintain the opposing forces of stability and change. This challenge may be met by recognizing that different requirements of different strategic situations exist simultaneously in organizations (Burgelman, 1983, 1991). It is evident that certain divisions within a conglomerate or portfolio of businesses may need different strategic guidance, specifically those that require entrepreneurship and experimentation. In these cases, it may be in the best interest of the parent to spinoff or carveout units or divisions that do not fit the overall strategy of the parent. Moreover, with the merger craze of the 80's and 90's, many large conglomerates did not experience the benefits they had hoped for. According to a Wall Street Journal article, entitled "Big Mergers of '90s Prove Disappointing to Shareholders," many merger deals in the late 1990s such as AT&T and Daimler-Benz have been a big disappointment for stockholders (Murray, 2000). These deals suffered from many problems, which included such things as poor integration, overpaying for the deal, unrealistic expectations about synergies, and inadequate planning. In addition, both sides did not deal well with the softer issues of how the two organizations would fit together culturally or whether top talent would stay with the newly merged company.

Although buyouts and merger activity are on the rise since 2000, there are signs that this merger activity may have its downside. For example companies such as Time Warner Inc. and Tyco have been under intense pressure from activist hedge funds to breakup. The AOL acquisition of Time Warner never achieved the synergies that were anticipated and have since sold their music division in 2004 and book division in 2006 (Karnitschnig, 2006, June 2). Even though revenues have rebounded, the stock price languishes, and the company is really being run as two separate entities. Tyco's problem is its immense size created by the years of acquisitions made under former CEO, Dennis Kozlowski. The company is now too big and inefficient; thus spinning off some of their divisions, some experts believe, may make each individual division more efficient (Berman et al. …

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