The Allen & Overy survey, undertaken by the FT Research Centre in May and June 2007, canvassed the opinions of CEOs, CFOs and other director-level executives at FTSE 350 and Fortune 500 companies, revealed that almost two thirds of respondents expect demergers to be active in their sectors in the next 12 months (66%).  Demergers are seen by 60% of FTSE 350 respondents as a positive management tool, with the key drivers being seen as eliminating negative synergies (86%), low market valuation (70%) and shareholder pressure (64%).

Overview
Highlight findings
Further information
Our track record
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Overview

M&A has recorded its strongest ever six months with over US$1.1 trillion of deal flow announced in North America and Europe. The recent volatility in global credit and stock markets has led some analysts to question whether we are witnessing the end of this boom. However, company balance sheets remain strong and many companies are still in an acquisitive mode as they seek to boost growth, particularly in sectors where organic growth has been difficult to come by.

A significant component of this record deal-making boom of the past few years has been the strategic M&A moves of leading FTSE 350 and Fortune 500 companies. Looking forward, these same companies will need to drive through the successful post-merger integration and rationalisation of their acquisitions. Further, in an era of ever more activist shareholders, pressure is ever greater for corporates to demonstrate the clear attainment of synergies from M&A activity.

This is where demergers are seen as adding critical shareholder value, by allowing management to rationalise those company divisions or product areas that do not fit optimally within the larger, evolving corporate structure. The benefits of demergers can be manifold: unlocking shareholder value by isolating underappreciated businesses; improving company focus by stripping out non-core businesses; helping to eliminate negative synergies; and freeing up capital for further potential acquisitions. Further, demergers can become more popular as a strategy in weakening markets.

That said, there remains a perception that demergers are complicated, costly and risky processes to pursue. Tax and pension issues are cited as obstacles and analysts and company boardrooms often disagree over the correct valuation of a company’s different divisions.

With such rapid expansion and change the need to understand the dynamics of demergers is an increasingly necessary component in the M&A business. With the correct advice and strategic management, companies can quickly remove obstacles to demerging less profitable operations, allowing them to focus on their core operations.

As part of our interest in understanding these changing market dynamics, Allen & Overy commissioned the FT Research Centre to survey FTSE 350 and Fortune 500 senior executives to capture their views on the drivers of demergers. In May and June 2007, the FT Research Centre interviewed 100 CEOs, CFOs, heads of M&A and other director-level executives at 100 companies, split evenly between the FTSE 350 and Fortune 500 indexes.

The findings points to the future benefits a well planned demerger can bring to a company and the positive way it may be viewed by both competitors and investors.

• 60% of FTSE 350 executives see demergers as a positive strategy
• Eliminating negative synergies (86%), low market valuation (70%) and shareholder pressure (64%) are seen as the main drivers of demerger activity
• 66% of executives expect very active or active demerger levels in their sector
• TMT, Consumer and Financial Services are the sectors expected to see significant demerger activity
• 87% expect private equity or hedge funds to influence demerger activity
• Mainland Europe and Asia Pacific are expected to be hotspots for demerger growth
• Taxation issues are the major obstacle to demergers according to 61% or respondents

Further information

If you would like to discuss the findings of this study and access the full report please contact Mike Beswick (London)  mike.beswick@allenovery.com  or tel: +44 20 3088 3288 or Jaime Bruck (New York) jaime.bruck@allenovery.com or tel: +1 646 610 6675.

The following articles resulted from this campaign: 

• "Executives Predict more Spin-Offs As Credit Crisis May Encourage IPO Strategy," The Associated Press, August 31, 2007.
• "Top executives see 'spinoffs' increasing in '08," The National Law Journal, August 9, 2007.
• Forthcoming article in Mergers & Acquisitions, October 2007.

Your key contacts

Alistair Asher
Dana Burstow
Richard Cranfield
Mark Dighero
Alun Eynon-Evans
Mike Gilligan
Jack Heinberg
Gillian Holgate
Ian Lopez
Dave Lewis (US tax)
Alan Paul
Julie Quinn
Hans-Christoph Ihrig