Business Trends: Spin-offs and Splits

Dr. Neil Holman Ph.D.

Thursday, October 23, 2014

Kraft Foods.  Abbott Labs.  EBay.  Baxter. Philips. Sears.  Hewlett-Packard. What do all these companies have in common?  All of them have announced plans, or have already taken steps, to spin off divisions or split into two companies.  What’s behind this trend, and what problems can occur as a result?

“The opportunity to revisit the fixed and variable cost structure of a newly formed enterprise can provide for new investment, innovation, and commercial global opportunities not realized in the pre-existing company structure,” says Tony Poidomani, LFGSM faculty member specializing in accounting and finance.

Analyst Joe Cornell in Forbes (10/7/13) says that these spinoffs are almost always lucrative in the market: “A Credit Suisse study last year found that over the prior 17 years, spin-offs beat the S&P 500 by some 13 percentage points in the year following their liberation.”  A large, complex company can extract value by allowing investors to put their funds into a division whose products or direction they can directly champion.

Lately it seems that these split-ups are happening more frequently. “There were 265 spin-offs announced in 2011 and 172 in 2012, with an aggregate value of $208 billion and $14 billion in 2011 and 2012, respectively” (Wachtell, Lipton, Rosen & Katz, Spin-Off Guide, 2012).

The local market

Locally, Motorola split into Motorola Mobility and Motorola Solutions in 2011. Kraft split off its snack foods into Mondelez in 2012.  The same year, Sara Lee Corp. split into two companies – Hillshire Brands (meats) and D.E Master Blenders (international coffee and tea).  Abbott Laboratories split off its research-based drug business into AbbVie, while retaining medical devices, generic pharmaceuticals, diagnostic and nutritional businesses, in 2013.  This year, Sears Holding Corporation completed its spin-off of Lands’ End.  And Baxter International has announced that it will split into two companies, one focused on developing biotechnology and pharmaceutical medicines and one that sells medical products, by mid-2015.

Challenges

Spinning out a company from the consolidated group can be a daunting undertaking. There can be considerable challenges when putting such plans into action.  Where there was once an integrated board of directors, executives and strategy, two now have to be formed.  The HR teams have to figure out how benefits – which may include stock – are to be defined and managed.  Contracts have to be examined and perhaps rewritten or renegotiated.   Who owns the assets of each company, including office space, computers, and phone systems?  How are the services of the parent company (e.g., Legal, HR, IT, Finance) to be divided?  What regulatory implications and hurdles are there?

Apart from these, there is a more basic need – who goes where?  In any change, employees will be nervous, but in a corporate split, there is far more uncertainty:

  • Who will manage the new enterprise?
  • Which members of the leadership team will move?
  • Where will the new company have its headquarters?
  • Will my job change?

LFGSM’s Corporate Learning Solutions (CLS) team recognizes this uncertainty and helps companies cope with it.  Our faculty advises executives and managers, and can help ease the pain for employees by counseling companies on best practices in managing change.

Opportunities

Creating new companies out of existing ones can be the catalyst for innovation, new profit opportunities, and greater returns for shareholders.

CLS can work with these new enterprises in these key areas:

  • Leadership
  • Strategic direction
  • Culture formation
  • Change management
  • Financial decision making

One of the strengths of LFGSM is the experience our faculty has in leading companies through such changes.  Strategic analysis can provide insights and help fledgling companies make decisions that will help them succeed.

TwitterLinkedInPrintFriendlyShare
 

(Category: )