"Tell me about a recent deal" - is talking about a carve-out/spin-off appropriate?

This is a super common interview question. Typically candidates talk about M&A transactions, but I wanted to know if it is perfectly fine to talk about a recent spin-off instead of an M&A transaction. If I follow the same format as an M&A answer (name of parent and carve-out, size of the deal, structure of the deal (% owned by parent, proposed share price, shares outstanding liquidation period, etc.), impact of parent's share price after announcement, and strategic rationale), then can this be considered an appropriate response to the question?

Comments (8)

Nov 25, 2018

Of course, spin-offs have been in vogue the past several years

In addition to the points you mentioned, be sure to have a rough idea of who the comps are for each company (SpinCo and ParentCo) and roughly what multiples they trade at; surfacing value at each company is a key driver of spin offs (i.e. ParentCo was trading at x, but post-spin off SpinCo traded up to y and ParentCo traded to z). Other benefits include improved management focus, more business appropriate capital structures, better research coverage

You should also be somewhat aware of the dis-synergies involved with spin offs including incremental corporate overhead, reorgnization taxes, etc. There is also risks at time of post-spin churn as investors sell-off either company post-close

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Nov 25, 2018

Thanks for the advice!

Nov 25, 2018

So the deal that I'm talking about is a carve out. Should I mention what multiples the company was trading at prior to announcing the carve-out and then the multiples post-ipo? The carve-out was actually very recent and there hasn't really been much price action in the ParentCo and CarveCo so I don't think it would say much if I mentioned what it was trading at the day of the ipo, and a month after the ipo.

Nov 26, 2018

^This is good advice. I would second all of it, and emphasize that carveouts are usually far more complicated than are regular sellsides, so you'll get at least as much credit for being able to describe one intelligently.

Understood that it's a little too soon to tell how well the market is perceiving the deal or how the seller's strategy is playing out, but I'd make certain that you understand and have quantified what the shareholders have now vs. what they had before, and what that was/is worth.

Nov 25, 2018

To err on the side of caution, I would limit it to a carve-out only. Technically, a spin-off is not an M&A transaction, and I wouldn't talk about it in an interview setting.

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Nov 25, 2018

Ok, thank the Lord! The deal that I've been analyzing for the past hour has been a carve-out. Wouldn't have wanted that hour spent in vain. Thanks.

Nov 29, 2018

Bad advice. Spin-offs are definitely interesting transactions to discuss in a buyside interview. There's always a strategic rationale to spinning off assets that impact an investor's view on company and generally present good investment opportunities due to existing shareholders selling spinco shares that they aren't interested in owning. Spin-offs also generally shift trading multiples as the two separated entities will have different growth trajectories and margin profiles. This is all important information to an investor (both public and private equity investors).

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Nov 29, 2018
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