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Financial services firms fall short a year after demerger; M&A.

Financial services companies are the worst performers after a demerger, while technology, media and telecommunications (TMT) and manufacturing companies are the most successful, according to a new report.

Research from Deloitte found financial services demergers have the lowest average share price increase one year after announcement - just two per cent - after analysing global data spanning a 10-year period from July 1998.

But the researchers found demergers in TMT and manufacturing outperform other groups.

A year after a demerger, manufacturing industry parents achieve a 38 per cent premium to share price, while TMT parent companies achieve 29 per cent. Birmingham-based Deloitte corporate finance partner Darren Boocock said: "Financial services companies are particularly vulnerable to staff and customer movements, which can destroy value quickly.

"With the financial services industry facing an unprecedented restructuring, it is crucial the slew of demergers taking place buck the historical trend."

Deloitte's research also highlights the increased value businesses realise from a demerger and sale process.

Parent companies increase their share prices by an average of 23 per cent a year after announcement, while spun-off "child" companies achieve a 15 per cent share premium to their initial public offering value a year after the demerger.

Mr Boocock said: "Genuine value can be generated from a demerger but you only reap what you sow.

"Companies that take longer than nine months to plan their demerger, generate at least two times more value, achieving an average 20 per cent increase in their share price.

"This contrasts with those that take less than nine months, who only saw a 10 per cent increase in share price value.

"With many companies considering selling off non-core portfolio companies in the face of economic adversity, the analysis shows that early preparation pays dividends over fire sales.

"Carve-outs and business sales create more value than acquisitions. Selling off part of the company is something that management tend to resist, except in those rare circumstances where it is obvious that another owner can generate more value.

"In practice stock analysts can value separated businesses better, and investment allocation decisions can be better made in each business, rather than as a combination.

"In contrast, acquisitions are more aspirational, with limited access to data on which to make bids and pricing decisions.

"Interestingly this research shows that value from a sell-off is created regardless of the growth of the underlying economy - a comforting thought in the current downturn."
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Sep 24, 2008
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