One of the stand-out trends in the M&A market this year has been a surge in the number of businesses looking to split the overall company.
By the summer, divestitures had risen to a record share of global mergers and acquisitions activity so far this year, accounting for about half of global dealmaking, according to Dealogic data. In the U.S., such activity was up more than 40 per cent on the first half of 2010.
As companies come under pressure to generate return to shareholders in a flatlining economic environment, particularly if they are sitting on big cash piles, the options for some have been simply to break themselves up.
The resources sector has produced prime candidates for demergers. One of the first to highlight the emerging trend was Marathon Oil, the fourth-biggest integrated U.S. oil and gas company, which announced in January plans to split into two by separating its refinery and pipeline operations from its exploration and production business. By doing so it replaced a company valued by the market at $23-billion with two companies worth a combined $36-billion. Analysts said the company had difficulty standing out, being too small to consider against other large integrated groups. Investors warmly received the move with a share price rise.
ConocoPhillips also decided in principle to split in two in July. It announced plans to divide its refining business and exploration and production assets into separate corporations.
Jim Mulva, the chief executive who is set to retire when the formal separation takes place next year, said at the time that the rationale was to unlock shareholder value in an intensely competitive industry. In theory, demergers allow each distinct business to focus exclusively on its own priorities and investment ambitions, and should thus create greater returns for shareholders. The move has raised questions about the integrated model of oil companies and suggestions about whether other majors should follow the move.
“The ability for many majors to trade around their downstream businesses to create profits are significant,” says KPMG’s Anthony Lobo. “You may continue to see some majors sell unprofitable downstream businesses.”
In particular, analysts have focused on BP. JPMorgan has been calling for a split of the group since 2006, some analysts estimating that it could add tens of billions to its value. Other names in the sector have also been suggested as candidates for demerger. Analysts at Evolution Securities, for example, have said a break-up of Eni, the Italian oil group, would make sense.
However, some sector specialists are more sceptical that the trend will become widespread. “I don’t think there is a one-size-fits-all answer to this,” says Jon Clark of Ernst & Young. “The integrated model has benefits but not to all and not in every market.
We will see strategic positioning and capital allocation continue to be important topics for the majors and are likely to see further downstream divestments.”