Mergers and demergers have been all the rage on the ASX over the past few years. It seems we can only go for a month or two these days without finding out about a new plan to split or merge an ASX share or two.
Just this week, we had the splitting of Tabcorp Holdings Ltd (ASX: TAH), which spun out The Lottery Corporation (ASX: TLC) on Tuesday. This follows several high-profile demergers before it.
Endeavour Group Ltd (ASX: EDV) flew the Woolworths Group Ltd (ASX: WOW) nest last year. Iluka Resources Limited (ASX: ILU) split with Deterra Royalties Ltd (ASX: DRR) back in 2020.
There's also a debate raging within AGL Energy Limited (ASX: AGL) as to whether going down the demerger route is the best way forward for the company. A vote will take place on 15 June.
But demergers, despite the hype, don't always work out for ASX investors.
Since its demerger in 2020, Deterra Royalties shares have gone backwards. Lottery Corp shares haven't exactly had a kind first few days of trading either.
Is a demerger ever a bad thing for ASX shares?
According to a report in the Australian Financial Review (AFR) this week, this is no accident. Macquarie analysts have run the ruler over the ASX's history of demergers and found that "demerged businesses usually underperform by up to 10 per cent in the first six months".
Not only that, but the analysts also found "the trend has only become stronger in the past five years, with spun-out businesses taking at least 12 months to trade well with spells of underperformance longer and stronger".
But that's only for the spun-off company. In the parent company's case, Macquarie revealed the picture can get even bleaker still:
For the parent, the wait to returns has been even longer. Macquarie found it's not until 18 months after the demerger goes live that the head stock starts to outperform. The parents have done slightly better in recent years because of stronger run-ups in the share prices between the announcement and the implementation, but it's still taking them up to 12 months to outperform.
Of course, there are exceptions. Endeavour had a relatively successful split from Woolworths. And until this year, the Coles Group Ltd (ASX: COL) split from Wesfarmers Ltd (ASX: WES) back in 2018 looked like pure genius.
But still, numbers don't lie. Macquarie's analysis indicates that investors in a demerged or demerger company face an uphill battle for returns.
No doubt Tabcorp and Lottery Corp shareholders will be hoping their companies turn out to be trend-buckers. But we'll have to wait and see.
