WHAT WORKS BEST FOR WHOM?
Though the various public divestiture tactics all lead toward separation, the most appropriate tactic can depend, in part, on the specific characteristics of the parent and subsidiary. General market conditions will be a factor. Interestingly, neither our own empirical research nor the published literature provides any evidence supporting size or industry as key determinants of methods employed. In general, IPOs are selected over spin-offs in the following cases:
- To dispose of more highly valued businesses
- Businesses with higher growth rates
- Businesses with a greater need for capital (Capex and R&D)
- During bull-market periods
- Where parent companies themselves exhibit lower growth profiles and more financial leverage
In the case of IPOs, rival share price reaction is often negative, implying the market may view the event as a signal of sector overvaluation or that the economic gains from IPOs are expected to accrue at the expense of rivals. In contrast, rival share price reaction to spin-offs tends to be positive, potentially a signal of undervaluation.12
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