Demerger can be very good for business

Published on Sunday 21 September 2008 21:16

DEMERGERS create an average increase in company value of 23 per cent in the year following a split, according to research published today.

Analysis of global data spanning a ten-year period from 1998, shows that parent companies recorded an average rise in their share prices of 23 per cent.

The spun-off "child" companies achieved a 15 per cent share boost a year after a demerger, according to calculations for the report.

Demergers in the manufacturing and technology, media and telecommunications (TMT) sectors outperformed other industry groups, according to accountancy firm Deloitte, which carried out the analysis.

One year after announcement of the demerger, manufacturing industry parent firms achieved a 38 per cent boost to their share price, while TMT parent companies recorded a 29 per cent lift.

Financial services demergers gave the lowest average share price increase, at just 2 per cent.

Tom MacDonald, a corporate finance partner at Deloitte, said: "Financial services companies are particularly vulnerable to staff and customer movements, which can destroy value quickly.

"With the financial services industry facing an unprecedented restructuring, it is crucial that the slew of demergers taking place buck the historical trend."

George Budden, a partner at Deloitte, said: "Genuine value can be generated from a demerger, but you only reap what you sow. Companies that take longer than nine months to plan their demerger generate at least two times more value, achieving an average 20 per cent increase in their share price.

"This contrasts with those that take less than nine months, who only saw a 10 per cent increase in share price value."

Budden added: "With many companies considering selling off non-core portfolio companies in the face of economic adversity, the analysis shows that early preparation pays dividends over fire sales."

And he said: "Carve-outs and business sales create more value than acquisitions.

"Selling off part of the company is something that management tend to resist, except in those rare circumstances where it is obvious that another owner can generate more value.

"In practice stock analysts can value separated businesses better, and investment allocation decisions can be better made in each business, rather than as a combination.

"In contrast, acquisitions are more aspirational, with limited access to data on which to make bids and pricing decisions."

Deloitte analysed 1,178 global, public deals, valued at more than $2 billion (1.1bn), announced between July 1998 and 2008.