Okay, so you’re listening to the Deep Dive, and we’re really glad you’re here. Yeah, thanks for joining us. Today’s Deep Dive is going to be all about corporate restructuring. Yeah. So, if you’re listening to this, you’re probably a corporate finance professional. You’ve got maybe three to 10 years of experience.

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You might be working at FP&A. You’re doing, maybe you’re a corporate development. Yeah. You’re the finance business partner, or you’re a controller, or maybe even treasury. Yeah, you’re probably dropping the weeds in some of these companies. And you’ve been working, you’ve probably encountered this strategic question. Like, when do you split a company up, and when do you keep it together? Right, when does it make sense to have everything under one roof, and when do you say, “You know what, maybe these pieces would be better off on their own.” Right, and how do you actually figure that out? Exactly, and that’s what we’re talking about today. So, we’re diving deep into, you hear these terms, spinoffs, carve-outs, divestitures. What do those actually mean? What do they mean? And more importantly, why do companies do them? And what are the implications for enterprise value, capital allocation, and the big one, shareholder returns? And we’re going to really try to go beyond just, you open up the textbook, and these are the definitions. We’re going to really try to get into why strategically do companies actually do this.

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And we’ll look at some real-world examples. Absolutely. And the finance team is right in the middle of all this. And center. So, we’ll talk about that as well. So, I think a good place to start is, let’s just get right at that fundamental question, right? Why would a company ever want to break itself up? Yeah, that does seem counterintuitive, right? It does. You think bigger is better, stronger. More scale, economies of scale. Exactly. All those things we learned in business school, but the reality is that… Yeah, sometimes it’s just not. Sometimes it’s not. And what happens is, as these companies grow, they get really complex. They become these big conglomerates with lots of different moving pieces. And sometimes those pieces, they’re not really fitting together all that well. They’re not synergistic. They’re not synergistic. The incentives might be misaligned. You might have one division that’s high growth and another one that’s more mature and they’re kind of butting heads and… Or they’re competing for resources or they’re in completely different markets. Completely different markets. And what happens is you get this thing called the conglomerate discount. Yeah, I’ve heard of that. Where the market says, “You know what? This company as a whole is actually worth less than the sum of its parts.” Right, because they can’t quite figure out what the heck is going on. Exactly. There’s too much noise, too much complexity.

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So restructuring then becomes a way to kind of unlock that value that’s trapped inside. Yeah, that’s interesting. So let’s say you’ve got a division that’s doing really well, but it’s inside this bigger company that maybe is not doing as well. Or it’s just a totally different business. How does spinning that division off actually create value? So think about it this way, right? You’ve got this high-growth division. It’s killing it, but it’s stuck inside this larger, slower-moving company. It’s almost like it’s being held back. Yeah, it’s like you can’t quite breathe. Exactly. It can’t breathe. Its potential is masked. Investors can’t really see it clearly. They don’t know how to value it. They don’t know how to value it. And even internally, right? It might not be getting the resources it needs to really thrive. Yeah, because the parent company is focusing on its own thing. Exactly. They’ve got different priorities. So when you separate it, you suddenly shine a spotlight on that division. Investors can now see it clearly. They can value it appropriately. And management can really focus on that specific business. Yeah. So, what are some of the signals that companies are thinking about doing this? Well, one of the biggest ones is just strategic misalignment. Right? They’ve got this business unit that just doesn’t really fit anymore with the long-term vision of the company. They’ve kind of grown apart. Exactly. It’s like you started out doing one thing, and then you kind of went in different directions. And it’s time to break up. And it’s time to break up, right? So that’s one big one.

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Another one is what we talked about earlier, that the market might actually value that standalone business a lot higher. Yeah, they want pure plays. They want pure plays. They want to be able to invest in a specific sector or a specific business model. It’s like they don’t want to buy the whole grocery store. They just want the milk. Exactly. They just want the milk, right? So when you’ve got this complex conglomerate, it’s harder for them to understand what each piece is really worth. Yeah. But when you separate it out. They can say, “I get it.” Bing. I know what this is. This is a software company. This is a consumer products company, whatever it is. Yeah. And they’re willing to pay a premium for that clarity. Yeah, focus. Focus. Yeah, I like that. And then also, of course, for public companies, that’s all about shareholder value. It always comes back to that, right? At the end of the day, if management thinks that by separating these businesses, they can actually create more value for shareholders than by keeping them together. Well, that’s a pretty compelling argument to do something. Especially if you’re a CEO and your job is to maximize shareholder value. Do your mandate. Right. So you’ve got to be looking at these options. And then there’s also the operational side of it, right? Yeah. Sometimes it’s just about simplifying things. Yeah. You’ve got these massive companies and they’ve got all these different legal entities and bureaucracy, different systems and processes. Right. And then so sometimes it’s just like, “Let’s just make it simpler.” Yeah. “Let’s streamline. Let’s get rid of the redundancies.” Right. And that can also save money too, right? Absolutely. Efficiency leads to cost savings. Which is good for the bottom line. And then sometimes you have these companies that have taken on a lot of debt.

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And so they need to clean up their balance sheet. They need to de-leverage. Yeah. And so they might say, “You know what? We’re going to sell off this division that maybe is not core to what we do, but someone else might really want it.” Yeah. A strategic buyer. Yeah. And then they can use that cash to pay down their debt. And strengthen their financial position. Right. So there are a lot of different reasons why companies might choose to restructure. Yeah. It’s not just one size fits all. Not at all. It’s very situation-specific. Okay. Well, so we’ve talked about the theoretical reasons. Why would a company want to do this? But let’s look at some real-world examples. Yeah. Let’s bring it to life. Okay. So you know, one that comes to mind is PayPal and eBay. Ah, yes. The classic spinoff. Yeah. That was back in 2015. 2015. And so obviously they were together for a while. They were a power couple for a time. Yeah. So what was going on there? Why did they decide to split up? So PayPal was really taking off, right? E-commerce was exploding. Online payments were becoming the norm. It was the future. It was the future. And PayPal was right at the forefront of that. Yeah. But they were kind of tied to eBay’s marketplace business, right? Which was a little bit more old school. A little bit more traditional.

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And so some people argued that PayPal wasn’t really getting the attention it deserved. It wasn’t getting the investment, the strategic focus that it needed to really become what it could become. Yeah. Because eBay was focused on its own thing. Exactly. Right. And sometimes you have these situations where you’ve got a really high-growth disruptive business unit, and it’s kind of trapped inside this more established parent company. Right. And the parent company might not even understand it. They might not even fully get it. Yeah. And so it’s like the kid who’s ready to go to college, but they’re still living at home with their parents. Right. And the parents are like, “No, you got to stay here and finish high school.” Yeah. But they’re ready. But they’re ready to go. Yeah. So that’s kind of what was happening with PayPal and eBay.

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So then what happened? So they split up, and then what? So they split u,p and the results speak for themselves, right? PayPal took off. It was huge. It became this dominant force in fintech. Yeah. It’s almost hard to remember a time when they weren’t a major player. Right. Exactly. Yeah. And eBay, they were able to kind of streamline their operations. Yeah. They focused on their core business. They focused on what they were good at. Right. And investors loved it. They did. They rewarded them for it. Yeah. PayPal’s valuation went through the roof. Yeah. That’s a great example. So it really shows you how separating a high potential business unit can really unleash its growth. Yeah. Focus, focus, focus. Focus is key. Okay. So let’s look at another one. Dell and VMware.

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Okay. Yeah. That was an interesting one. So that was 2021. So that’s a little more recent. More recent. Yeah.

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And so VMware, you know, they had like the cloud software, you know, the leader. Yeah. Infrastructure software. Infrastructure. Yeah. Virtualization, all that stuff. Yeah. So why did Dell decide to spin them off? Well, so in this case, it was a little bit different, right? VMware was doing well. Yeah. But for Dell, it was also about, you know, they had done a lot of acquisitions over the years. They had a pretty complex capital structure. A lot of debt. They had a lot of debt. And so they were looking for ways to kind of simplify things. Yeah. Clean up the balance sheet. Clean up the balance sheet. Yeah. You know, reduce their debt burden. And so spinning off VMware allowed them to do that. So they got some cash from that. I gave some cash. They were able to, you know, kind of streamline their, you know, their financials. Right. And it actually made them a more attractive investment for, you know, for other investors. So they got a better credit rating. Yeah. They improved their credit profile. And, you know, for VMware, it allowed them to kind of, you know, operate more independently. Yeah. Focus on their own thing. Focus on their own thing in this, you know, really competitive cloud market. Right. So it was a win-win. Yeah. Everybody was happy. In this case, yeah. Okay. So we’ve seen spinoffs.

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Let’s look at another example. Johnson & Johnson. J&J. Yeah. So they spun off their consumer health division. Right. And they called it Kenview. Kenview. Yeah. And this was just last year, 2023. Very recent. So what was the thinking behind that? So, you know, J&J, they’re this massive company, right? They’ve got pharmaceuticals. They’ve got medical devices. And then they had this consumer health division. Which is like Band-Aids and, you know. Yeah. Tylenol. Yeah. You know, all the over-the-counter stuff. Yeah. And so the thinking was that, you know, these are actually pretty different businesses. Yeah. They have different growth profiles. They have different research and development needs. They have different regulatory environments. Yeah. And so by separating them out, J&J could really focus on, you know, the pharma and the medical devices. Which are more their core business. Which are, you know, kind of their bread and butter. Right. And Kenview could, you know, really go after the consumer health market. Right. You know, with a dedicated strategy. And that consumer health market is huge. It’s massive. Yeah. So it made sense to kind of let them, you know, run free. Yeah. And focus on what they do best. So it seems like, you know, in all these cases, like spin-offs have worked out pretty well. Yeah, for the most part. But it’s not always a slam dunk, right? It’s not always a guarantee. Yeah. So is there an example where like maybe it didn’t go so well?

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Well, one that comes to mind is AT&T and WarnerMedia. Yeah. So this was back in 2022. Okay. And this is actually an interesting one because it was kind of the reverse of a spin-off. Right. It’s like they got together and then they broke up. Exactly. So AT&T, they had acquired Time Warner a few years earlier. Right. With this big idea that they were going to create this, you know, telecom and media powerhouse. Yeah. It was going to be like the, you know, it’s vertically integrated. They were going to own the pipes and the content. It was going to be amazing. Yeah. But it turned out that, you know, integrating these two massive companies with very different cultures was really, really hard. Yeah. Telco and media are like two totally different worlds. Yeah. So the synergies that they had hoped for, they just didn’t really materialize. It was a lot harder than they thought. A lot harder. And, you know, sometimes that happens, right? Yeah. You don’t know until you try it. You don’t know until you try it. Yeah. And so in this case, you know, they realized that it was actually destroying value. To keep these two businesses together. So it was better to break up. It was better to break up. So they spun off WarnerMedia. And emerged with Discovery. And then they emerged with Discovery. And, you know, AT&T went back to focusing on, you know, their core business, wireless broadband. Yeah. Back to their roots. Back to their roots. So it was, you know, it was an expensive lesson. Yeah. That was a lesson learned. Right. And it also shows that like sometimes, you know, bigger isn’t always better. Sometimes it’s not. Sometimes, focus is really important. Yeah. Okay. So that’s a great example. What about GE? Ah, GE, the granddaddy of conglomerates. Yeah. They’re breaking up too, right? They are. It’s a multi-year plan. That’s a big one. It’s a big one. They’re breaking up into three different companies. Oh. GE Healthcare, GE Aerospace, and GE Vernova, which is going to be focused on energy.

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So they’re basically undoing like a hundred years of, you know. Yeah. A hundred years of history. Mergers and acquisitions. Exactly. They’re going back to their, you know, they’re more focused roots. Yeah. And the idea is that, you know, these businesses, they’ll be more agile. They’ll be able to respond to, you know, market changes more quickly. Yeah. They won’t be bogged down by the bureaucracy. Exactly. Of this massive conglomerate. Right. Right. And it’ll be easy for investors to understand them. Yeah. Transparency is key, right? Yeah. And so when you’ve got these, you know, separate businesses that are clearly defined investors can say, okay, I get it. Yeah. I know what this company does. I know how to value it. Right. And they’re more willing to invest. They’re more willing to invest and they’re willing to pay a higher price. Yeah. So that’s a really interesting one.

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So we’ve seen a lot of examples of companies breaking up. Mm-hmm. But what about a company that’s decided not to break up? Okay. Yeah, that’s a good point. Even though maybe some people think they should. Right. So what about Meta? Meta, yeah. Formerly Facebook. Yeah. So they’ve got this, you know, reality labs division. Right. All the VR, AR stuff. The Metaverse. The Metaverse, yeah. So that’s been losing a lot of money. It has been a big investment. Yeah. And some people are saying, like, why don’t you just spin that off? Yeah. Cut your losses and move on. Yeah, but they haven’t. They haven’t. So why is that? So this is an interesting case because it shows you that, you know, the decision to restructure is not always just about the numbers. Yeah. Right. It’s also about, you know, the long-term vision of the company. Yeah. But they really believe it. Exactly. So Mark Zuckerberg, he’s really committed to this idea of the Metaverse. He thinks it’s the future. He thinks it’s the future. Yeah. And he believes that, you know, Reality Labs is a key part of that. Right. And so even though it’s losing money right now, he’s willing to kind of, you know, write it out. He’s playing the long game. He’s playing the long game. Yeah. He’s betting that, you know, eventually it’s going to pay off. Yeah. And he’s got the, you know, the resources to do that. He does. He’s got deep pocket. Yeah. So that’s a really interesting example of like, you know, sometimes companies, they’re going to hold on to something. Even if it’s not, you know, making money right now. Right. Because they believe in it. They believe in the long-term potential. Right. So it’s not always just about, you know, short-term profits. Yeah. Sometimes it’s about, you know, the bigger picture. Yeah.

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Okay. So we’ve talked about a lot of examples. We have. But let’s just like define some terms here. Okay. Let’s clarify some things. Yeah. Because we’ve been talking about spin-offs, carve-outs, and divestitures. Yeah. What do those actually mean? Yeah. So let’s start with spin-off. Like we’ve been using that term a lot. Yeah. What exactly is a spin-off? So a spin-off is when a company takes a subsidiary and they basically give the shares of that subsidiary to their existing shareholders. So they’re just like giving them away. They’re giving them away. Yeah. And they create a brand new independent company. Okay. That’s now publicly traded. Yeah. So the shareholders, they end up with two different stocks. They do. They’ve got their original stock in the parent company. Right. And now they’ve got stock in this new spin-off company. Okay. And so is that different from a carve-out?

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Yes. A carve-out is a little bit different. Okay. So in a carve-out, the parent company, they’re still selling a portion of their subsidiary.

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But they’re typically doing it through an IPO. Okay. So they’re going public with it. They’re going public with it. But they’re not giving away all the shares. They’re not giving away all the shares. They’re usually keeping a controlling stake. So they still have control. They still have control. Okay. And the money that they raise from the IPO, that goes to the parent company. Okay. So it’s a way to raise some capital. Yeah. Without giving up complete control. Without giving up complete control. So it’s a bit of a hybrid approach. Okay. And then what about divestiture? So divestiture is the simplest one. Okay. It’s just a straight up sale. They’re selling the entire business unit. To someone else? To another company. Could be a competitor. Could be a private equity firm. Whoever wants to buy it. And they’re out. And they’re out. They’re done with that business. So it’s a way to kind of, yeah, raise capital obviously. But it’s also a way to kind of streamline their operations, focus on their core businesses. Get rid of the distractions. Exactly. Yeah. Okay. So those are the three main types. Yeah. Those are the big ones. So we’ve talked about the strategic reasons for doing all this. Right. But what about for someone who’s listening to this, who’s in the corporate finance world? What does it mean for you? What’s their role in all of this? Right. Because this isn’t just some theoretical exercise. This is stuff that you’re going to be dealing with in your day-to-day job. Yeah. So let’s say you’re in FP&A or corporate development or treasury. What are some of the things that you might be doing? So one of the biggest things is you’re going to be doing a lot of analysis. Right.

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When a company is thinking about restructuring, you’re going to be the ones who are crunching the numbers, figuring out, okay, how do we actually separate these businesses? Right. How do we allocate the assets, the liabilities, the revenues, the expenses? Yeah. It gets complicated. It gets really complicated. So you need people who are really good with accounting, really good with financial modeling, to kind of untangle all of that. And then you’ve got to figure out, what’s it going to look like in the future? Exactly right. You’re not just looking at the past. You’re trying to project what’s going to happen to these businesses once they’re separated. So you’re building these really complex models. Right.

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You’re forecasting growth rates, profitability, cash flows. And there’s a lot of uncertainty there. There it is. You’re trying to figure out, okay, if we spin off this division, is it going to grow faster? Is it going to be more profitable? It’s going to be able to stand on its own two feet. Exactly. So it’s a really challenging, but also really interesting part of the job. Yeah. And then you’ve also got to think about the debt. If a company has a lot of debt, how do you allocate that debt between the different entities? Right. Who gets what? Who gets what? And what does that mean for their credit ratings? Yeah, because that’s going to affect their cost of capital. Absolutely. It affects their ability to borrow money in the future. So you’re going to be working with bankers and lenders to figure out the best way to structure all of that. And then you’ve got to be able to explain all this to investors. Yeah. Communication is key. You got to be able to tell the story. Why are we doing this? What are the benefits? What’s the value proposition? What’s the value proposition? How is this going to create value for shareholders? And how’s it going to affect their earnings per share? Exactly. All those things. So you’ve got to be able to communicate clearly and concisely. Yeah, and be persuasive. And be persuasive. Yeah. So yeah, your role in corporate finance during a restructuring is really important. It’s not just about crunching numbers. It’s strategic. It’s strategic. It’s about understanding the big picture. And it’s about being able to communicate effectively. So it’s a really exciting area to be in. Okay, so for our listeners, they’re listening to this. They’re like, “Okay, this is all very interesting.” But what are the key takeaways? What should they remember from this? Yeah. So I think the biggest takeaway is that spinoffs carve out divestitures.

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These are all really powerful tools that companies can use. To create value. To create value, to improve their focus, to simplify their operations, and ultimately to make their shareholders happy. So if you’re in corporate finance, you need to understand how these things work. You need to be able to analyze them. You need to be able to model them. And you need to be able to communicate about them. And you might actually be involved in doing them. Exactly. You might be the one who’s putting together the presentation for the board. Or you might be the one who’s building the financial model. So it’s really important to have this knowledge. And as you get more senior, you might actually be the one making the decisions. Exactly. You might be the CFO who’s saying, you know what, we need to spin off this division. Or we need to divest this business unit. So the more you understand about these transactions, the better equipped you’ll be to make those kinds of decisions. Right. And also, even if you’re not the one making the decisions, you’ll be able to understand what’s going on. Yeah. You’ll be able to see the strategy behind it. You’ll be able to analyze the financials. And you’ll be able to say, you know what, this makes sense, or this doesn’t make sense. Right. So it’s really a valuable skill set to have. Okay. So to wrap things up, corporate restructuring, it’s a big topic.

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But hopefully, we’ve given you a good overview. Yeah, good starting point. Yeah. And kind of like the key things to think about. The key considerations. Yeah. So now we’re going to leave you with a question. Okay. Hit them with a question. Think about your own company or a company that you follow. Yeah. Are there any divisions or business units that you think might actually be more valuable? Right. If they were on their own. If they were spun off or carved out. Yeah. Is there something that’s kind of hidden inside this bigger company? Right. That could really shine if it was given its own spotlight. Right. And what are the financial and strategic factors that you would need to consider? Yeah. How would you analyze that? To figure that out. Exactly. So that’s something to think about. Something to ponder. Yeah. And you’re all smart corporate finance professionals. Yeah. You’re the experts. So you can figure this out. You got this. Yeah. And we hope that this deep dive has given you some of the tools and the knowledge to kind of tackle these kinds of questions. To think critically about these issues. Yeah. So thanks for listening. Thanks for joining us. And we’ll see you next time.

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See you on the next deep dive.