December 5, 2017
By Mike Niland, US Divestitures Leader, PwC Deals
Spinoff activity is on the rise again this year. Historically, increases in the number of spinoffs has preceded high points in the market, according to Dealogic data. In the chart below, you can see the market reached a high point in 1999, as did the number of spinoffs. Then the dot-com bubble burst in 2000 and spins started to decline as well. The market and spinoffs were at a high point again in 2008 just before the housing bubble caused the market to decline. The market and spinoffs have steadily risen since then but dipped slightly towards the end of 2016 into 2017 due to uncertainty with the new regime. However, with a bit more clarity on the regulations changes and continued strong market, we expect spin-offs to pick up again in 2018.
Companies getting back to their core as well as activism will continue to fuel the actions required to deliver higher shareholder returns making spinoffs high on the corporate agenda. However, a reduction in the corporate income tax rate and other related changes as a part of the tax reform may motivate companies to consider both sale and spin-offs as equally viable and comparable options to maximize shareholder returns.
This current trend is not surprising when you look at the compelling reasons for spinning off a part of your business: focusing on core competencies and strategic goals, accessing capital, reaping tax advantages, the sum of the parts are greater than the whole and of course, unlocking shareholder value.
On top of those reasons, spinoffs can provide solid returns. According to recent findings from Quantamental Research Group, within the U.S., spun-off entities generate long-term outperformance after the spinoff, and parent companies often outperform their industry peers between the announcement date and closing date.
7 tips for a successful spinoff
As with any deal, it’s important to understand the process, create an effective plan, and maintain laser focus on the end goal. Here are seven tips to help your company successfully execute a spinoff:
1. Do the right deal at the right time – Companies that understand their strategy and business lifecycle utilize portfolio analysis to rapidly exercise M&A options. An informed decision to spin-off a business sooner allows divestitures to be a vehicle for transformation, value creation and corporate renewal.
2. Create two strong and sustainable companies not one – Have an unbiased approach to separation. Separate the two companies in a manner that provides them both with strong management teams and optimal resources, capital, infrastructure and cost structure to execute the strategy.
3. Obtain data to drive business insights and make decisions – Shrewd companies realize the importance of breaking down organizational silos to obtain the data required to rapidly present the business in a consistent manner across multiple decision makers throughout the spinoff process.
4. SEC requirements are a hurdle, but can be managed – Spinoffs trigger regulatory requirements from the SEC, including preparing carve-out financial statements and registration statements. A project management team should be established that is accountable and responsible for complying with SEC requirements in order to reduce disruption to the business and avoid unpleasant, potentially costly, surprises down the road. In addition, as with any transaction, speed to market is crucial therefore using technology and advanced deal analytics capabilities can automate some of regulatory requirements process as well.
5. Motivate your current employees – Let’s face it, you’re going to be asking some of your employees to do two jobs at once until the separation is complete. The duration and complexity of divestitures requires multiple communication channels and change agents to align around the divestiture benefits and to motivate key stakeholders. Change is never easy, and it’s important for management to serve as leaders for employees to help them through the transition and see where they fit.
6. Don’t wait for Day One – You’ll need to develop new operating models with a clear breakdown of functional activities, disentangle back-office infrastructures and plan for ongoing financial reporting. Create a new management team and separate legal, finance and HR functions and a plan for what staff will go with the business. Day One readiness planning needs to start early and be a consistent touchstone throughout the spinoff process.
7. This could take a while – Spinoffs rarely fail due to a flawed strategy. Rather, failure is often a result of not executing the strategy in a timely and coordinated manner. The spinoff and separation process should focus people and capital on the right activities at the right times.
A spinoff requires a significant investment of time, money and energy. It usually takes several months to complete a transaction of this nature. It is vital to hire and retain the right people to handle the heavy lifting and to create a plan while keeping the remaining businesses running effectively while the spinoff is in motion.
Seize the opportunity
As you assess your portfolio, you might notice that one part of your company doesn’t quite fit in or isn’t measuring up in your current construct. A spinoff might be the answer to help you carve out value and deliver strong returns for your shareholders. If you’re not sure what kind of transaction is appropriate for you, our recent paper for Boards outlines the pros and cons of the various divestiture options.
Yes, these deals are complex. However, with the right portfolio management and planning, a spinoff can help you regain focus and create value. Here at PwC, we can help you each step of the way – from strategy through day-one readiness planning to post-separation transition.