Corporate Restructuring: Spin-offs in a spin
The spin-off has been heralded as the tool of the future - the means to prepare sprawling European companies for the next century. But is it as successful as investment bankers and their clients would have us believe? Not according to Paul Gibbs, an equity analyst at JP Morgan in London.
He does not reject the importance of large companies spinning off subsidiaries. Indeed, part of his research concentrates on generating scores for corporate clarity: "Any company which scores less than 70% is a prime candidate for restructuring of some sort or other, and there are plenty of those around," says Gibbs. "For those lower down the list, the spin-off could be a useful tool." According to his clarity figures, one-third of the UK's top 125 companies by market capitalization fall into this category - and the UK is usually held up to be the most advanced country in Europe as regards corporate restructuring.
It is another part of his research brief which questions the use of the spin-off. Gibbs and his team have been tracking the share price performance of both the parent companies and their spun-off siblings. There are two potential benefits from a spin-off: first, that the parent company's share value will improve once it has demerged a division which is unrelated to its core business; and second, that the newly-formed entity, now free of a larger corporate, can improve by being more fully in control of its own destiny.