The all-important question swirling in the boardrooms of corporate America is: Who is creating more value? Is the bigger-is-better crowd right? Or is the smaller-and-more-focused pack the one to follow? And is the premise of the question even correct? Is it an either-or proposition?
Mergers have a spotty record of creating value. Putting two companies together is risky. Take your pick from dozens of academic studies and the consensus is that mergers destroy value at least half of the time, to the point that it’s almost become a cliché. But when mergers are timed right — usually during a downturn in the market — and executed properly (usually with smaller acquisitions), much value can be created.
Spinoffs and divestitures, however, are usually a much better bet. The studies repeatedly show that spinoffs and divestitures create value both in the short and long term. Some studies show that companies that are involved in a spinoff outperform the market by 15 to 30 percent over three years. Even the announcement of a spinoff seems to push stock prices higher. According to the Boston Consulting Group, “55 percent of all divestitures created value, as measured by the average cumulative abnormal return” over seven days.
Of course, it is an axiom in the deal-making game that companies go through buildup cycles only to later tear down. Rinse and repeat.