The 2026 separation wave is not being driven by distress. Scale, CEO turnover, and strategic intent are changing how these deals price and where returns actually form.
Dec 17, 2025, 12:00 AM
Written by:
Niko Ludwig
Table of Contents
Key Takeaways:
This separation cycle is being driven by strength, not stress. Companies are announcing separations from positions of balance sheet stability and equity market support, which changes both motivation and pricing dynamics.
Scale has fundamentally altered return profiles. With average deal sizes projected at $18 billion, price discovery takes longer, liquidity risk increases, and traditional six to twelve-month event windows may no longer apply.
Boards are using separations as strategic signals. Fewer deals are being approved, but those that clear tend to reset long-term direction rather than incrementally adjust portfolios.
Returns concentrate on execution, not structure. Markets continue to price separations categorically, while value is increasingly determined by integration capability, leadership stability, and transition complexity.
The separation market projected for 2026 doesn't resemble the forced divestitures or activist-driven breakups that defined previous cycles. Average deal size has doubled. One-third of recent large separations were announced by CEOs in less than two years. The underlying motivation has shifted from distress to strategic repositioning, and the market hasn't fully priced what that means.
At first glance, the market looks active.
Morgan Stanley’s Q3 2025 update shows more than $1 trillion in M and A volume clearing in a single quarter. But the headline obscures what actually changed. Deal count fell to decade lows, while the average transaction size climbed to $1 billion, the highest level in twenty-five years.
Capital is not spreading. It is concentrating.
Boards are approving fewer decisions, but they are making them count. Incremental portfolio adjustments are struggling to clear committees. Transactions that survive scrutiny increasingly reset direction in a single move, concentrating capital into deals that define where a company is going rather than refine where it has been.
That shift has changed how separations are used.
Rather than waiting for pressure from activists or balance sheet stress, companies are acting earlier.
Financing conditions have become easier to underwrite, equity markets remain supportive, and lower volatility has reduced the perceived cost of visible strategic action. Separations are no longer cleanups. They are signals, announced from positions of strength to communicate intent.
The pattern is visible in where activity is landing.
Technology, financials, energy infrastructure, and industrials account for a disproportionate share of megadeals.
The Americas and Asia are running above long-term averages, while middle market activity remains largely unchanged. As transaction size increases, the primary risk shifts away from valuation assumptions toward execution quality, elevating the importance of integration capability and stakeholder management.
In a market defined by fewer, larger, and more deliberate decisions, one outcome follows naturally. Separations have become the preferred mechanism for strategic repositioning, setting up a wave projected to reach $350 billion in 202
Traditional separation discount models assume assets are being shed because they underperform, don't fit, or face pressure from activists who identified value trapped in conglomerate structures.
The market applies a haircut accordingly. When a company announces a separation while equity markets trade at all-time highs and interest rates are declining, that discount framework warrants reexamination.
Morgan Stanley's data shows separation volumes projected for 2026 at $350 billion, 1.5 times higher than any year in the last decade. More significantly, the last 12 months saw twice as many separations with $10 billion-plus aggregate value compared to any prior rolling 12-month period in the last 15 years. Scale at this level indicates strategic repositioning, not portfolio cleanup.
Michael Kagan, Morgan Stanley's Global Head of Separations and Structured Solutions, framed it clearly:
"Companies are reshaping themselves to adapt to a quickly changing environment and position themselves for their next phase of growth."
That's offense, not defense.
The pricing implication
Markets don't always distinguish between pressure-driven and strength-driven separations at announcement. When that distinction gets missed, the opportunity concentrates on initial pricing rather than post-separation performance. Special situations investors focused on post-separation performance may be looking at the wrong window. The opportunity lies in how the market interprets motivation at deal launch.
New CEOs are leading the wave
CEO tenure patterns reveal something about risk tolerance and capital allocation philosophy. 33% of recent large separations were led by CEOs who had been in the role for less than two years.
New CEOs face lower political costs for restructuring. They didn't build the existing portfolio, so unwinding it doesn't repudiate their own decisions. The board that hired them often expects strategic action, not continuity. That creates a window where bolder moves become feasible.
For investors, this raises a practical question. How much does shorter CEO tenure correlate with execution risk in complex separations, particularly when leadership reorganization accompanies the transaction?
How size changes the return profile
In prior separation cycles, size worked in investors’ favor.
A $3 to $5 billion spin-off could find its owners quickly. Event-driven funds stepped in. A handful of long-only investors followed. Ownership equilibrated. Pricing caught up.
That rhythm no longer holds.
In 2026, the average separation is projected to reach $18 billion, more than double the 2020 to 2025 average. At that scale, liquidity dynamics change. Index inclusion matters more. Institutional ownership takes longer to settle. The gap between announcement and full price discovery widens.
There is a trade-off.
Larger separations attract analyst coverage faster, compressing traditional information advantages. An $18 billion entity cannot be ignored by sector teams. Research coverage ramps quickly, and asymmetry narrows sooner than in smaller deals.
But liquidity risk scales non-linearly.
Building or exiting positions takes months, not weeks. Holders constrained by mandate or index eligibility may be forced sellers before natural demand materializes. For patient capital, those dislocations can create opportunity.
The result is a different return profile. Holding periods extend. Volatility increases. The traditional six to twelve-month event window can stretch toward eighteen months, where index inclusion and ownership equilibration lag fundamentals.
Why this matters?
First, it helps explain why so many separations are happening now rather than being deferred because leadership turnover is creating action bias.
Second, it suggests that execution risk may be higher than historical separation averages would imply, particularly in cases where the CEO is simultaneously reorganizing leadership and carving out a business.
That's not an argument against the opportunity. It's a reminder that the return distribution may be wider than past cycles, with both larger upside from bold strategic moves and more potential for stumbles in execution.
Execution complexity is where returns concentrate
Separation theory meets operational reality in three areas where both value creation and risk intensify:
Transition service agreements: SEC Form 10 disclosures for recent large separations show TSA terms extending 18 to 36 months in complex cases. During that period, reported margins can be misleading as ParentCos have incentive to allocate costs favorably, while SpinCos build in conservative assumptions to beat guidance.
Leadership transitions: 20% of recent large separations included significant leadership reorganization at announcement. Separating a business while simultaneously installing new management means the execution team may lack institutional knowledge about operational dependencies.
Capital structure decisions: ParentCo must decide debt allocation between entities. Too much debt weighs down the SpinCo; too little strains ParentCo's balance sheet. Getting it wrong by even 10% can materially impact both valuations.
Where is the opportunity?
Scale tends to amplify interdependencies. A $2 billion carve-out typically runs on standalone systems with clear cost allocation. An $18 billion separation from a $60 billion parent often involves shared IT infrastructure, overlapping supply chains, and corporate functions requiring 18-to-36-month transition agreements.
Observable execution signals include:
Program management capability and separation team experience
TSA documentation detail and dependency mapping
Management's track record with complex restructurings
These variables are observable before separation closes but don't typically get priced in by markets focused on pro forma financials.
For special situations investors, this is where fundamental analysis still drives returns. Template models that apply historical separation discounts miss the execution details that determine whether a specific separation creates value or destroys it. The market tends to price separations categorically.
Returns concentrate in the ability to distinguish between well-executed separations and complex ones likely to hit operational snags.
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