Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Spin-Offs Create More Value Than Sell-Offs
Transcript
- Lucas: There is a moment in every corporate life where the board has to decide: do we sell this division, or do we spin it off to shareholders? Luna: And the market usually reacts very differently to those two paths. Lucas: Completely different. And I think the conventional wisdom is that spin-offs create more value, but the data actually supports that — with nuances. So let's look at two big ones from the last eighteen months: GE Vernova and Honeywell's recent spin-off. Luna: GE Vernova — that's the energy business that GE carved out in April 2024, right? Lucas: Exactly. GE split into three: aerospace, healthcare, and energy. Vernova was the energy piece — gas turbines, wind, grid software. On the first day of trading, Vernova popped about 7 percent. The parent, GE Aerospace, also went up. That's the classic spin-off pattern. Luna: Versus a sell-off, where you'd see the buyer's stock drop because they're paying cash or taking on debt. Lucas: Right. Now Honeywell — they announced in early 2025 that they'd spin off their automation and industrial controls division. That's still in progress, but the market reaction on the announcement day was a 4 percent bump in Honeywell stock. Compare that to if they had sold it to a private equity firm — the stock probably would have been flat or slightly down. Luna: So why does the market consistently reward spin-offs? Is it just the tax advantage? Lucas: Tax is a big part. A spin-off is usually tax-free to shareholders, whereas a sale triggers capital gains. But there's also the operational focus argument. A spun-off company can make decisions faster, align incentives better, and attract different management talent. The market assigns a higher multiple to a pure-play company than to a conglomerate. Luna: That's the 'conglomerate discount' working in reverse. Lucas: Exactly. But here's the nuance I want to drill into: not all spin-offs are created equal. The ones that create the most value are the ones where the spun-off company has a clear strategic identity and a strong management team from day one. If it's just a dump of unwanted assets, the market will sniff that out. Luna: So what about the Reverse Morris Trust? That's a structure that often comes up in spin-off discussions. Lucas: The Reverse Morris Trust — RMT — is a tax-free way to combine a spin-off with a merger. Basically, a parent company spins off a division into a separate company, and then that new company merges with a buyer. The shareholders of the parent end up owning more than 50 percent of the combined entity, so it qualifies as tax-free. Luna: That's a way to get the tax benefit of a spin-off while still achieving a sale. Lucas: Right. And we saw this used in the 2023 merger of AT&T's WarnerMedia with Discovery — though that was a Reverse Morris Trust on a massive scale. For smaller operators, it's less common because the legal and advisory fees can be prohibitive. But when it works, it's a beautiful structure. Luna: Let's bring it down to the indie operator level. If I'm selling my business, should I think about a spin-off? I mean, I'm not a public company. Lucas: You can't do a tax-free spin-off if you're private, but you can use the logic. For example, say you run a company with two distinct divisions — a manufacturing arm and a services arm. A buyer might only want the services arm. Instead of a straight sale, you could carve out the manufacturing arm into a separate entity, keep that, and sell the services arm to the buyer. That way, you retain the upside of the manufacturing business and get a clean valuation for the services piece. Luna: So you're essentially doing a spin-off to yourself before the sale. Lucas: Exactly. It's a structural decision that can increase the total proceeds. I've seen deals where the seller got 15 to 20 percent more by doing a carve-out and then selling the core division, versus selling the whole company as a mixed bag. Luna: But doesn't that require more time and legal work? You're basically running two transactions. Lucas: It does. But if the divisions are truly distinct, the market will pay a premium for clarity. And for operators who are thinking about their exit three to five years out, prepping the business for a spin-off-style separation can be a smart move. Luna: Okay, so spin-offs generally win. But are there cases where a straight sell-off is better? Lucas: Yes — when the spin-off would create a company that's too small to survive as a public entity. If the division has less than, say, a billion dollars in revenue, the administrative costs of being public could eat up the value. In that case, selling to a strategic buyer who can integrate it is better. Luna: So size matters. Lucas: It matters a lot. The spin-off premium only appears when the spun-off company is viable on its own. Otherwise, it's just a value destruction event. Luna: Let's talk about the Honeywell spin-off in more detail. They're spinning off their automation business. What's the market expecting? Lucas: The market expects a 5 to 7 percent pop on the first day, based on precedent. Honeywell itself will trade at a higher multiple after the spin-off because it becomes a pure-play aerospace and defense company. The automation business will probably trade at a lower multiple than Honeywell as a whole, but the combined market cap of the two entities should be higher than the original one. Luna: So the whole is worth less than the sum of its parts. Lucas: That's the thesis. And historically, it's been true for about 80 percent of spin-offs in the last 20 years. But the timing matters — if you spin off during a bear market, the pop might be muted. Luna: Right now, in June 2026, the market is pretty uncertain with interest rates still high. Does that affect the spin-off math? Lucas: It does. Higher discount rates mean lower present values for future cash flows, so the pure-play premium shrinks. But it doesn't disappear. The tax benefit remains, and the operational focus argument is independent of rate cycles. So spin-offs still make sense, but the magnitude of the value creation might be smaller. Luna: That's a good reality check. Lucas: Alright, I want to shift slightly. You know, when we talk about these structural decisions — spin-off versus sell-off — it's about getting the best outcome for the stakeholders. And sometimes the best outcome comes from having the right advisors and the right framework. I've been thinking about this because the show you're listening to, The Acquisition Talk, is exactly that kind of resource. If these conversations have moved your work forward in some small way, we keep this show ad-free and independent. The only thing that makes that possible is listener support. So if today's episode was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. No pressure, just a small way to keep the conversation going. Luna: Yeah, I think that's a fair ask. We put a lot of work into finding the right cases and the right numbers. Lucas: We do. And it only works if it's useful to you. So back to the spin-off mechanics — I want to talk about the one risk that often gets overlooked. Luna: What's that? Lucas: The retained liability. When a parent spins off a division, it usually indemnifies the new company against certain legacy liabilities — like environmental cleanup or product liability. That can come back to bite the parent years later. Luna: So it's not a clean break. Lucas: Not always. In the GE Vernova spin-off, GE retained some liability for old gas turbine issues. That's a contingent liability that could cost them billions if it materializes. The market prices that in. Luna: So when you evaluate a spin-off, you have to look at the fine print. Lucas: Absolutely. And that's where the advisors earn their fees. For operators listening, if you're considering a spin-off or a carve-out sale, get a good lawyer and a good investment banker who have done this before. The structural details matter more than the headline numbers. Luna: Alright, so to wrap up: spin-offs tend to create more value than sell-offs, but only if the spun-off company is viable, the tax structure is right, and the retained liabilities are manageable. Lucas: That's the short version. And for the indie operator, the lesson is: think about separation early. If you have two business lines that don't belong together, start separating them now — on your own terms — so that when a buyer comes, you can maximize value. Luna: Or spin it off to yourself and sell the better piece. Lucas: Exactly. That's the playbook.