As the Covid-19 induced crisis progresses, we expect companies to separate portions of business. Such actions will be driven by strategic decisions to divest businesses and/or valuation creation opportunities. These may take form of spin-offs, carve-outs or sales.
Primary reasons for spin-off include (i) Value creation – both for parent company and new separate public company; (ii) Certainty of execution; (iii) Tax free to parent and its shareholders; (iv) Can be run parallel with other divestiture alternative. These are typically a 6-12-month process that involves carving out a business from the parent (e.g. financials, management). It involves various documentation and filing requirements (e.g. SEC filings, IRS private letter ruling) and may or may not be preceded by an IPO. We provide an overview here.
As coronacrisis progresses expect companies to separate portions of business. Such actions will be typically driven by strategic decisions to divest businesses and/or valuation creation opportunities. Often there is a valuation drag on due to ownership of lower valuation businesses. Spin-offs often have potential for shareholder value creation when investors have higher valuation expectations of the new separate public company.
ActiveAllocator Research – Re. WSJ Wed, June 24, 2020, A1 article ‘Dell Explores Spinning Off $50 Billion VMware Stake”. I see at least three options for Dell – an outright spin-off, a carveout, or a total sale. All of these will unlock Dell’s $50 billion, 81% VMware stake, boost stock-price which has been near static while tech indices have surged past year, and reduce its debt burden. We have a fair bit of experience in the investment banking space and I will keep you posted as the deal progresses.