Corporate Spinoffs: Gain Greater Total Shareholder Return
Most owners of mid-sized businesses are always on the lookout for new ways they can increase shareholder value and Total Shareholder Return (or TSR). Corporate spinoffs are among strategies used by middle market businesses. As the name implies, this is a unique kind of M&A transaction in which a company “spins off” one or more business units into a separate company. Doing so may enable owners and executives to focus more clearly on the core business while enabling the spun-off entity to pursue its own core business and markets.
While they are becoming more common than in the past, corporate spinoffs are still a lesser-used M&A tool that is often misunderstood by middle market CFOs and business owners. When executed with the right strategy, corporate spinoffs can greatly increase TSR. For example, between 2002 and 2017, new businesses that were created via a corporate spinoff and the original businesses that performed the spinoff both generally outperformed the market.
Build a Strategic Case
The most important key to the success of a corporate spinoff is building a well-developed strategic case for the transaction. For example, you need to identify the right assets or business units to spin off and determine the best timeframe for performing the spinoff. And you need to clearly explain the rationale for the spinoff to the investment markets and other interested stakeholders.
For example, maybe you want to create a more business-appropriate capital structure, or a distinct investment profile for both the original business and the new spun-off business. Or perhaps certain business units are no longer closely related to your core competencies and spinning them off will make it easier to stay focused on your core business. Maximizing TSR from a corporate spinoff requires devising a well-thought-out, long-term plan and then executing this plan flawlessly.
Your company could experience negative impacts by failing to adequately plan for a corporate spinoff, including the following:
Poor performance of the corporate portfolio.
Misalignment of corporate resources.
An inability to adequately focus on your core business.
Failure to maximize TSR from the transaction.
Keys to Success
An article recently published on CFO.com1 identified six key steps to a successful corporate spinoff:
1. Keep leadership in-house. In a study of 124 global spinoff transactions conducted between 2002 and 2017, most new spun-off entities that delivered higher TSR than the original company tapped a candidate from the original company as the CEO, CFO or both.
2. Focus on the operating model. You should think about how your operating model will need to change in order to support the new spun-off entity, as well as whether the assets of the original company are a good fit for the new entity.
3. Devise appropriate tax strategies. Corporate spinoffs always have potential short- and long-term tax implications. These could affect the transaction itself and the operating models of both the original company and the new spun-off entity.
4. Create a stakeholder communication plan. This plan should clearly communicate the rationale and timeline for the spinoff to all stakeholders, as well as the expected TSR and value creation.
5. Focus on the growth of both companies. The long-term success of the spinoff is contingent on the growth not only of the original company, but also of the new entity. So think carefully about how the new entity can grow — for example, by launching new products and markets, increasing R&D spending or acquiring other businesses.
6. Act in a timely manner. Another study of 54 global spinoffs found that corporate spinoffs with a window of 7 to 16 months between the announcement and the transaction generated positive TSRs, while those with a window of longer than 28 months generated negative TSRs.
Your company could realize many positive outcomes by performing a successful corporate spinoff, including the following:
Greater potential to outperform the market.
Increased short- and long-term TSR for both the original and spun-off companies.
Easier for management to focus on the core business.
Potentially lower taxes when compared to a straight business sale.
Easier for the new spun-off entity to launch new products and pursue new markets.
One strategy sometimes used by middle market businesses to increase shareholder value is the corporate spinoff. While they are becoming more common than in the past, corporate spinoffs are still a lesser-used M&A tool that is often misunderstood. When executed with the right strategy, however, corporate spinoffs can greatly increase TSR. An outsourced CFO services provider can help you plan for a successful corporate spinoff.
1 Six Key Steps to a Successful Spinoff; Tze-Liang Chiam and Lasida Klinsukond; CFO.com; July 31, 2018
John W. Braine, Partner, CFO Edge, LLC