# Divestitures, Carve-Outs, and Spin-Offs
When Danaher spun off Fortive in 2016, the market did something counterintuitive: it valued the two pieces at more than the whole had commanded a year earlier. No synergies were created that day. No cost was cut. No revenue was added. Management simply drew a line down the middle of the portfolio—and roughly $10 billion of latent value surfaced. The businesses were identical the day after separation; only the ownership structure and the investor lens had changed.
This is the uncomfortable truth every acquisitive CFO must internalize: the same discipline that justifies buying a business often justifies exiting one, and the market frequently rewards subtraction more reliably than addition. Roughly two-thirds of acquisitions destroy value; a well-executed separation, by contrast, has a far better empirical track record. Yet CFOs spend the overwhelming majority of their corporate development energy on the buy side. The asymmetry is a career-limiting blind spot.
Start with the mechanism, because "unlocking value" is a phrase that should trigger skepticism, not applause. Separation creates value through four distinct channels, and a CFO must be able to name which one is operative in any given deal.
The conglomerate discount is real and quantifiable. Diversified companies trade at a discount to the sum of their standalone parts—typically 6% to 12%, and far more in extreme cases. The discount exists because capital markets punish opacity. When a industrial-plus-software business reports consolidated numbers, neither the industrial investor nor the software investor can build a clean model. The industrial investor discounts the software growth they can't isolate; the growth investor discounts the cyclical drag they can't strip out. Separation resolves the ambiguity and lets each investor base pay full multiple for the asset they actually want.
Capital allocation gets sharper.
Management incentives sharpen with the business. A divisional president running a $2 billion unit inside a $40 billion parent is measured on internal metrics and paid partly on parent-company stock they can't move. As CEO of a newly independent $2 billion company, their equity is directly levered to the performance of the business they actually control. The behavioral shift is not marginal.
The strategic-fit argument runs in reverse. The same logic that made an asset a good acquisition target for someone else makes it a good divestiture candidate for you. If a competitor can extract more synergy from your non-core division than you can, the asset is worth more in their hands—and a trade sale captures a control premium a spin-off never will.
The CFO's first job is to interrogate which of these is driving the thesis. A separation justified purely by the conglomerate discount is fragile: if the market re-rates the parent for unrelated reasons, the rationale evaporates. A separation justified by genuine capital-allocation and incentive misalignment is durable. Do not confuse a financial-engineering story with a strategic one.
These three are not interchangeable. They differ in who ends up owning the business, how much cash you raise, the tax treatment, and how much operational surgery you must perform. The choice is the single most consequential decision in the process, and it should be driven by three variables: your cash need, the quality of the standalone business, and the existence of a natural buyer.
Selling to a strategic acquirer or a financial sponsor delivers cash and a clean break. You transfer the asset, receive proceeds, and redeploy capital. It is the right instrument when a natural buyer can pay a control premium—typically because they can extract synergies you cannot—or when you need liquidity for deleveraging or reinvestment.
The pitfall is stranded costs. When you sell a division that consumed 15% of shared IT, HR, and procurement spend, the buyer takes the division but not necessarily the overhead. If the transition services agreement (TSA) is short and the buyer builds standalone functions quickly, you are left carrying corporate costs against a smaller revenue base. Margins in the RemainCo contract mechanically. A CFO who models the deal on the divested unit's economics alone, without modeling the dis-synergy to the parent, will be surprised in the second year.
A carve-out sells a minority stake in a subsidiary to public markets via IPO, while the parent retains control. It is a two-step play: monetize part of the business now at a public-market valuation, establish a standalone currency and price discovery, and retain optionality to spin or sell the remainder later—often tax-efficiently.
Ferrari's carve-out from Fiat Chrysler is the archetype. FCA IPO'd a slice of Ferrari, let the market establish it as a luxury company (not an automaker) commanding a luxury multiple, then distributed the balance to shareholders. The sequencing let the parent capture cash and a re-rating without a single-step gamble.
The carve-out is the most operationally demanding instrument because you must produce audited standalone (carve-out) financial statements—a genuinely hard exercise. Allocating shared costs, disentangling intercompany transactions, and constructing a defensible cost structure for the entity that never existed as a standalone is where deal timelines die. Start this 12 to 18 months before you intend to file.
A spin-off distributes shares of the subsidiary to existing shareholders pro rata, creating an independent public company. No cash changes hands, and in the U.S. a properly structured spin-off is tax-free to both the company and shareholders under Section 355—the single largest reason spin-offs are so popular.
The trade-off: you raise no proceeds. A spin-off is the right instrument when the standalone business is high-quality enough to stand on its own, when no buyer will pay a premium justifying a taxable sale, and when the value creation thesis is the focus premium rather than cash generation. GE's breakup into GE Aerospace, GE HealthCare, and GE Vernova is the defining recent example: three businesses too large and too different for any single acquirer, where independence itself was the value driver.
The decision tree in practice: If you need cash and a premium buyer exists, sell. If you want cash *and* re-rating *and* future optionality, carve out. If the business is strong, no premium buyer exists, and tax efficiency is paramount, spin.
The strategic choice is the glamorous part. The execution is where CFOs earn their equity. Four workstreams demand direct CFO ownership, not delegation.
Separating the financials. You cannot separate what you cannot measure. Carve-out financials must reconstruct three years of standalone statements, which means confronting every shared service, every intercompany transfer price, and every allocated corporate cost. The critical judgment call: which costs are genuinely attributable to the business versus which are parent-level costs that will *strand* in RemainCo? Auditors and the SEC scrutinize these allocations intensely. Under-allocating flatters the SpinCo and misleads investors; over-allocating strands cost in the parent. Get the allocation methodology signed off early.
The stranded-cost problem. This is the most underestimated destroyer of separation value. When you remove a business consuming a proportional share of corporate overhead, that overhead does not disappear on close day. If SpinCo represented 30% of revenue but you cannot immediately remove 30% of corporate cost, the residual is stranded in RemainCo, compressing its margins precisely when the market is re-evaluating it. The disciplined CFO builds a stranded-cost elimination plan *before* announcement, with committed timelines, and communicates the glide path to investors. Unmanaged stranded costs can consume the entire conglomerate discount you set out to capture.
Capital structure and the debt split. How do you allocate existing debt between the two entities? The principle is to leave each entity with a capital structure appropriate to its cash flow profile and cyclicality. A stable, cash-generative business can carry more leverage; a growth business should carry less. In a spin-off, the parent often loads debt onto the SpinCo (a "leveraged spin") to extract a cash dividend before separation—a legitimate way to monetize a tax-free transaction, but one that must not cripple the new entity. Rating agencies will evaluate both resulting companies independently, and a downgrade of either erodes value.
Transition Services Agreements. The TSA governs the services the parent continues to provide the separated entity—IT, payroll, finance systems—after close. It is your risk-management instrument and a frequent source of post-deal friction. Two errors dominate: TSAs priced too low become an ongoing subsidy that masks the true standalone cost; TSAs scoped too tightly leave the separated business unable to operate on day one. The CFO must ensure the TSA reflects genuine cost, includes clear exit ramps with penalties for overstay, and forces both entities to build true standalone capability on a defined timeline.
Vérification des acquis
1. The Danaher-Fortive spin-off example illustrates a central principle about separation. What is that principle?
2. The lesson argues that CFOs have a 'career-limiting blind spot.' What is the reasoning behind this claim?
3. Why does the conglomerate discount exist, according to the lesson's reasoning?
4. Select ALL correct answers. Which statements accurately reflect the lesson's view on why separation creates value?
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers. Which statements are consistent with the lesson's framing of buying versus exiting businesses?
Sélectionnez toutes les réponses correctes.
Mechanics get you to close. Judgment determines whether you created value.
Timing is strategic, not opportunistic. The instinct is to separate a business when it is struggling—to shed the problem child. This is often exactly wrong. You divest into strength: a cyclical business sold at the top of its cycle commands a premium; the same business sold at the trough transfers value to the buyer. The counterpoint is activist pressure, which frequently arrives *after* underperformance, forcing separations at inopportune moments. The CFO who has already stress-tested the portfolio for separation candidates negotiates from a position of preparation, not reaction.
The signaling problem. Announcing a divestiture tells the market you concede the business is worth more outside your walls. Handled well, this is a signal of disciplined capital allocation. Handled poorly, it reads as an admission that management overpaid or misjudged strategy years earlier. The narrative matters enormously. Frame the separation around the strengthened focus of both entities and the specific value thesis for each—not around exiting a mistake.
Portfolio discipline as a standing capability. The most sophisticated corporate development functions do not treat divestitures as episodic events. They run a continuous portfolio review, applying the same rigor to "should we still own this?" as to "should we buy that?" The question every CFO should force onto the board's agenda annually: *If we didn't already own this business, would we buy it today at its current market value?* If the honest answer is no, you are holding an asset whose highest-value owner is someone else. That is not a portfolio; it is inertia.
1. Name the value-creation channel before you commit. Separation value comes from the conglomerate discount, sharper capital allocation, aligned incentives, or a buyer's control premium. A thesis resting only on the discount is fragile; one resting on genuine misalignment is durable.
2. Match the instrument to your cash need, business quality, and buyer landscape. Sell for cash and a premium; carve out for cash plus re-rating plus optionality; spin off for tax-efficient separation when the business can stand alone and no premium buyer exists.
3. Model the stranded costs before announcement. The overhead a divested business consumed does not vanish at close. Build a committed cost-elimination glide path and communicate it—unmanaged stranded cost can erase the entire discount you set out to capture.
4. Start carve-out financials 12 to 18 months early and own the cost-allocation methodology. The SEC and auditors scrutinize allocations; timelines die here. Treat the TSA as a risk instrument priced at true cost with hard exit ramps.
5. Run portfolio review as a standing discipline, not a crisis response. Ask annually whether you would buy each business today at its market value. Divest into strength, before an activist forces your hand at the trough.