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Breaking Up Is Good to Do
Deloitte & Touche has quantified the obvious: shareholders benefit when unfocused firms spin off the disparate parts.
The research looked at 118 of the largest "demergers" between 1990 and 1999, and found that -- although initially viewed by the markets as bad news -- demergers were followed by an average increase of 52% in the share price of the parent company within the first year, and by an average increase of 46% in the spun-off entity's share price.
"The potential diseconomies of scale for both separating entities are far outweighed by clarity of purpose provided by the demerger," said a Deloitte representative.
Not all acquisitions are bad, we'd add. Clearly thought-out combinations are just as good for business as smart divestitures. The problem arises when merger rationales are poorly conceived and executed, often the hallmark of overly-aggressive and weakly advised CEO's.
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