Wall Street can be good for the legal market. But it may not be always good for business.
A recent press report tracks the increasing popularity of large companies spinning off certain business units. This is ostensibly intended to “unlock shareholder value.” Companies such as Tyco and Viacom have these plans underway.
Many of these conglomerates were created through a steady diet of acquisitions during the heady days of the stock markets in the 1990s. At the time, I think I recall justifications like “synergy” or “growing earnings at 15%.”
I definitely recall that administrative functions like HR, finance and legal would allegedly be more efficient since the associated costs could be spread over a larger asset base. Ask someone who has been acquired, however, about getting allocations of parent company overheads, often in amounts that exceed these expenditures prior to closing the deal.
If large companies are slowing down the acquisition train, after the spin-offs will Wall Street look to small company IPOs to fill the deal flow gap?
Professor Ribstein has recently noted that Sarbanes Oxley may be suppressing IPOs of start-up companies. Perhaps if an IPO is not the default exit strategy for the VC community, more companies will stay private longer, and focus on things like growing products to serve markets, rather than being a source for growing legal and investment banking fees.