Transaction strategy and execution

Corporate separation strategies, including carve outs, present a labyrinth of complexity, yet within this complexity lies the potential for profound transformation and expansion. In the wake of the global financial crisis, corporate landscapes underwent a significant shift, with companies embracing the allure of scale through extensive diversification and monumental merger ventures over the past decade. This era has given rise to a corporate ecosystem characterized by intricate portfolios.

However, as economic uncertainty persists and operating conditions grow increasingly challenging, organizations are reassessing their strategic imperatives. In response, many are turning towards corporate separations as a means to recalibrate and fortify their positions for future success.

This trend reflects a broader market sentiment favoring companies that prioritize focus and flexibility, opting to streamline operations by divesting non-core assets—a strategy colloquially referred to as “shrink to grow”. Notably, this surge in separation activity transcends industry boundaries, with sectors such as industrials and healthcare spearheading the charge towards strategic realignment and value maximization.

Corporate separations are intricate endeavors, yet they have the potential to yield substantial shareholder value and often surpass market expectations. We gauge the success of separations by assessing the total shareholder return of both resulting entities, RemainCo and NewCo.

Although sustained outperformance cannot be assured, the strategic foresight and decisions made by executives before separation are pivotal. There are five key areas where companies should concentrate their efforts to optimize long-term value for shareholders.

Transforming NewCo and RemainCo throughout the process

Corporate separations serve as opportunities for both NewCo and RemainCo to redefine their operations. Instead of adopting a straightforward “clone-and-go” approach, ParentCos should prioritize initiatives aimed at high-value, complementary transformations. These strategic shifts can significantly influence growth trajectories and gross margins.

Deriving benefit from dedicated management focus

Corporate separations afford leadership teams the chance to concentrate on the unique priorities of each business unit, particularly NewCo. Announcing NewCo leadership early in the separation process allows them ample time to shadow ParentCo executives, gaining valuable insights into public company responsibilities. This preparation equips the NewCo team to confidently lead the company and articulate its strategy as it prepares for its public debut.

Tailoring capital strategies to asset profiles

Corporate separations empower each business to customize its capital access and allocation strategies to its unique needs. With distinct financial profiles and operating stages, each entity can prioritize initiatives tailored to its goals. Post-separation, RemainCo typically emphasizes margin enhancement, while NewCo focuses on revenue expansion. RemainCo aims to boost its return of capital, while NewCo allocates resources toward organic and inorganic growth opportunities, including M&A. Successful NewCos allocate a larger share of total capital to fuel growth compared to their underperforming counterparts.

Navigating the separation process

Corporate separations demand time and resources. Over 60% of transactions took more than nine months from announcement to closure, with costs ranging from 1–6% of NewCo equity value. Interestingly, there’s no significant link between separation duration and post-separation performance. Companies need to balance timelines, costs, and provide NewCo with time to enact value-creating enhancements.

Communicating with stakeholders

Regular, transparent communication across shareholders, employees, customers, and suppliers helps build understanding and confidence in the program. It’s also essential to communicate the equity stories of both businesses to key stakeholders. This supports NewCo’s transition to becoming a newly public company and allows RemainCo to rebrand itself for existing and potential investors.

Corporate separations remain a favored strategy for unlocking value across industries. The recent increase in such transactions reflects their proven ability to outperform and navigate challenging market conditions. Executives equipped with a clear strategic vision and an understanding of the time and cost involved are poised to succeed in this journey.

In summary, leveraging separation strategies like carve outs as a driver for transformation significantly enhances the prospects of long-term value creation and market outperformance.