What it takes for your spin-off to deliver value
Spinning off a business can create value and accelerate growth at a company and the spun-off entity, delivering solid, long-term returns for stakeholders. But leaders need to ask critical questions as they consider whether a spin-off is the right transaction. Are there segments of your portfolio that no longer fit with your company’s core competencies, even if they continue to perform well? Are there business units that could perform better under focused leadership, and enable the remaining company to gain stronger focus as well? These considerations and others open the door for companies to explore spin-offs.
Effective planning across all elements of your business is vital to ensuring success. PwC looked at 900 spin-offs over the past 20 years to identify the strategies or methodologies that set the successful ones apart. Those who had the most success followed a detailed playbook based on wide-ranging spin-off experience, and we found five overarching commonalities:
- Strategy
- Discipline
- Cross-functionality
- Timing
- Data
Strategy
Understand the underlying shareholder value proposition of the suggested spin-off and how the opportunities for value creation are distributed across your business. It’s essential to identify key levers of performance — such as where you should focus on growth and where you should optimize margins or capital — that will drive value across different parts of your organization. Proactive portfolio assessments are critical to success.
Discipline
Take the time to define the structure, approach and roadmap for the transition. When spin-offs fail, it’s usually due to poor execution, not bad strategy.
Cross-functionality
Spin-offs are enterprise-wide transformative events. Be methodical and involve departments from the boardroom to the back office, each at the appropriate time. Delay in functional involvement at a critical juncture can extend the spin-off timeline and drive up transaction costs.
Timing
Do the right deal at the right time. Consider macro and geopolitical environments, economic indicators, industry trends and outlook, digital disruption, stock market expectations and other factors to determine spin-off timing. Failure to anticipate the impact of the external factors can adversely affect the transaction.
Data
Success means making sure every decision-maker has the right information, which requires going a layer deeper and analyzing what the data tells you to make strategic decisions. Break down company silos to get the data and share it while having a data management strategy to ensure a single source of truth.
For a successful spin-off, a solid management framework is essential
Creating a solid framework to manage the various components of a successful spin-off is essential. That framework starts with forming a governance structure, including establishing a transition management office (TMO) before the deal announcement to ensure operational cross-functional alignment. This framework should cover several areas:
- Spinning off a company can be disruptive for employees and investors. A strong communication and change management strategy will help ease concerns from staffers, customers and partners, and it will answer questions from investors, analysts and regulators.
- The tax considerations necessary to navigate a spin-off are complex and varied. The structure for SpinCo will significantly affect the tax position of both SpinCo and the Parent.
- Carve-out financial statements and regulatory compliance work draws from many areas, and it’s important to ensure that there’s collaboration among all internal and external stakeholders. It’s imperative for the entire team to be familiar with the complicated and time-consuming registration statement requirements and deadlines to ensure timely filing.
- A detailed financial model capturing the various scenarios of operating performance to give you flexibility and optionality — as well as capture true economic costs involved in the spin-off transaction — ensures continued focus on shareholder value throughout the transition. It also helps drive standardization across functional and geographic areas to ensure more accurate tracking.
- Separation agreements allow SpinCo and the remaining company to maintain continuity while ensuring that vital business processes and procedures remain robust throughout the transition.
- Operational separation includes designing a target operating model to organize people, processes, technology and data for the future state. This covers decisions about organizational structure, talent, contracts and other agreements. It includes establishing a separation management office and creating a transition services agreement to maintain business continuity.
- Functional area considerations — including various corporate functions from finance and risk management to HR and IT — must also be assessed and broken down into each area’s individual tasks and responsibilities on the transition timeline.
The companies that were able to drive significant performance in their stock prices relative to the market were able to unlock value by improving their execution pre- and post-spin-offs.
Leveraging experience for successful execution
Spin-offs involve a high degree of complexity, with many levers for realizing value. Minimizing one-time costs and stranded costs, increasing speed to market, limiting disruptions … all of these challenges and more require a detailed playbook that’s informed by extensive deals expertise. As you consider spinning off part of your organization, please review our Spin-off Roadmap: PwC’s guide to successful spin-offs, which is based on our experience helping hundreds of companies. Along with the help of experienced advisors, this guide will be instrumental to your spin-off success.
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