Just In Time For Expected M&A Drought, Here Come The Demergers

from the spinoff dept

Thu, Aug 9th 2007 8:08am — Joseph Weisenthal

The credit crunch may put some M&A activity on ice, but don't expect investment bankers to go hungry anytime soon. According to a recent survey, global executives expect to see plenty of demergers -- the practice of spinning off or selling business units. Of course, these things go in cycles. After any period of consolidations, bankers will encourage companies to "unlock shareholder value", by spinning off all of those units that were acquired during the previous wave. Undoubtedly, the executives predicting more demerger activity have been influenced by what their investment banking partners have advised them. In addition to the cyclicality of this, there's another reason to expect more of this activity. Selling off business lines can serve as a substitute for selling bonds when credit markets aren't being cooperative.

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Filed Under: m&a

5 Comments

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SPR, 9 Aug 2007 @ 9:13am

M&A
This makes sense. The bankers make money either way. I think this is called "churning".
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SomeOneElse, 9 Aug 2007 @ 9:15am

Monopoly With Real Money
Nice... These execs grab up smaller companies during a boom cycle and sell off as needed when the markets turn sour. Great for them, but what about the poor bastards at the small companies that got "Aquired" or "Mergered" -- what happens to them when they get (as was so politically-correctly put) de-mergered? Often they lose benefits, and/or get laid off entirely. All so some rich executives can play monopoly with real money, and real people's livelihood.
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Mike, 9 Aug 2007 @ 9:56am

Re: Monopoly With Real Money
That would be the definition of the "American Way". ;)
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Mike C., 9 Aug 2007 @ 10:48am

Just good business...
I've see this in a different light than just giving the banks the stockholders money. While I'm not particularly fond of the costs involved and don't necessarily agree with the practice, let me play devil's advocate for a second:

- Big Company has 6 divisions (A through F) that each do some different kind of job. Big Company is flush with cash during good times and buys up 3 smaller companies making them divisions G, H and I.
- Times turn and Big Company needs to trim the fat. They take a look and divisions C and E are doing poorly. Additionally, new divisions G and I have incurred significant costs that were not expected when the original deal went through. They "unlock shareholder value" by trimming the 4 lowest performing divisions (C, E, G + I) and raising their net profit margin.

Heck, I can see this happening at a former small business employer of mine. They sell a software package I wrote for them that goes great with their hardware. Unfortunately, I've moved on and they don't have any other developers. It's starting to become mission critical that they get someone to support and enhance it, but I'm unavailable at the prices they'll pay [think 60% going rate..]. They were bought out earlier this year and I know the buyer wasn't aware of the software issues and needs because not even the owner would recognize them (most of the reason why I left). If the purchased company doesn't keep it's margins up because it can't sell the software, do you think the buying company will want to continue to support them? Personally, I think not.
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"ill" duce, 9 Aug 2007 @ 2:09pm

Churn
It's churn. It used to be the purview of strategy consultants like McKinsey to convince CEO's that they need to be big and diversified. They play on their egos and collect wads of cash. They use terms like "economies of scale" and "optimized cross-functional platforms" to buy companies that aren't likely going to be a good fit. Then when the helm changes, they convince the successor to spin off "underperforming assets" in order to free up cash. Remember, many of the CEO's out there aren't very smart, they've just learned to play the game. They buy this stuff like junkies buy crack.
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