When it comes to creating value for shareholders, spinoffs and acquisitions are two very different but powerful tools. Over the years, I’ve learned that each has its own strengths, and which one delivers better results often depends on timing, market conditions, and the underlying businesses involved. Today, I want to share my perspective on how spinoffs and acquisitions compare when it comes to value creation, drawing from my personal experiences as well as real-world examples.
Spinoffs: Unlocking Hidden Value
Spinoffs have always intrigued me because they often unlock value that’s hidden within a larger conglomerate. When a business is spun off, it gains independence, and management can focus solely on the core operations of that business without the distractions of a larger corporate entity. This increased focus often leads to better performance and more agile decision-making.
One of my favorite recent examples is the spinoff of Siemens Energy from Siemens AG in 2020. By separating the energy business from its parent, Siemens allowed both companies to focus on their specific strengths. Siemens Energy was able to dedicate all its resources to the transition towards renewable energy, while Siemens AG could double down on its core focus—industrial automation and digitalization. Since the spinoff, Siemens Energy has gained traction, especially in renewable energy projects, and the value creation for shareholders was significant as both companies thrived independently.
What makes spinoffs attractive for investors like me is the initial period of indiscriminate selling that usually follows the announcement. Institutional investors who receive shares of the newly independent company often sell them off simply because the new entity doesn’t fit their portfolio criteria. This can create a buying opportunity if you’re willing to look beyond the noise and recognize the value hidden within the spun-off business.
Acquisitions: Synergy and Scale
On the other hand, acquisitions are all about synergy and scale. When done right, an acquisition can create substantial value by combining complementary businesses. Cost efficiencies, expanded customer bases, and improved market positioning are all potential benefits that can arise when one company acquires another. However, acquisitions also come with risk—poor integration or a lack of clear strategic fit can destroy value instead of creating it.
Take, for example, Microsoft’s acquisition of LinkedIn in 2016 for $26.2 billion. Initially, there were skeptics who questioned whether Microsoft overpaid for the professional networking site. However, Microsoft successfully integrated LinkedIn into its broader ecosystem, leveraging its reach to grow both LinkedIn’s user base and advertising revenues. The synergy between Microsoft’s products and LinkedIn’s network has driven significant value creation, and today, LinkedIn is a major contributor to Microsoft’s growth, justifying the hefty price tag.
Key Differences in Value Creation
From my perspective, spinoffs often lead to more focused value creation by allowing each company to zero in on their core business, while acquisitions typically aim for synergistic value creation through integration. The benefits of spinoffs are largely about bringing clarity to management and operational efficiency, while acquisitions hinge on capturing economies of scale and expanding market reach.
One important aspect to consider is risk. Spinoffs tend to involve less risk because they usually separate an already functional part of a business. The spun-off company already has its customer base, revenue stream, and operations. Acquisitions, however, require a more delicate balancing act—cultural integration, restructuring, and achieving synergies are all challenging tasks that can go wrong if not executed carefully.
Real-World Example: Honeywell Spinoff vs. Bayer Acquisition
To illustrate, let’s compare two cases that highlight these differences well. Honeywell spun off Garrett Motion, its turbocharger business, in 2018. Garrett Motion was able to focus solely on its automotive technology and expand its presence in the growing turbocharger market. Initially, Garrett faced some challenges, but as an independent entity, it could focus on innovating within its niche, which eventually led to value creation for shareholders.
In contrast, consider Bayer’s acquisition of Monsanto in 2018. Bayer aimed to create value by expanding its agricultural business and leveraging Monsanto’s expertise in seeds and herbicides. However, the integration has been anything but smooth. Bayer inherited numerous legal liabilities from Monsanto, including lawsuits related to the controversial herbicide Roundup. As a result, Bayer’s stock struggled, and the anticipated value creation has been largely overshadowed by the cost of litigation and integration issues.
Practical Takeaways for Investors
Assess Focus vs. Synergy: Spinoffs and acquisitions create value in different ways. If you believe in the power of focus, look for spinoff opportunities where a business can thrive independently. If you see strong synergy potential, an acquisition may be a better bet.
Consider the Risks: Spinoffs generally involve lower risk because they are about operational independence rather than integration. Acquisitions, on the other hand, come with higher risks, particularly around integration and cultural alignment.
Look for Initial Market Reactions: Spinoffs often present opportunities when there is indiscriminate selling, while acquisitions can create opportunities when the market is overly skeptical of the purchase price. Being attuned to these market reactions can lead to potential buying opportunities.
Conclusion
Both spinoffs and acquisitions are powerful tools for value creation, but they serve different purposes. Spinoffs unlock hidden value by granting independence and focus, while acquisitions aim to create value through synergy and expansion. By understanding the nuances of each, you can make better-informed decisions about which opportunities are right for your investment strategy. In my experience, there is no one-size-fits-all answer—sometimes the best opportunities come from separating a business, and other times they come from bringing two businesses together. The key is understanding the underlying dynamics and making your move when others are hesitant.