Is it time to separate from that division: divesting a subsidiary or operating division requires financing, strategic alignment and capital constraints, as well as buyers with interest in spin-off transactions, and comes with challenges common to contrasted executing these deals.

Author:Johnson, Howard E.
Position:CORPORATE SPIN-OFFS
 
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Corporate spin-offs (or "carve-outs") have regained popularity in recent years as many corporations look to divest of a subsidiary or business division that is viewed as being "off-strategy" in an effort to increase shareholder value. Spinoffs also provide the parent company with the financing needed to strengthen its balance sheet or to invest in other segments of its operations. (For details on North American spinoffs, see Exhibit 1 on page 26).

In some cases--such as high-growth and turnaround situations--the spin-off is considered necessary because the parent corporation does not have sufficient capital to fund the operations of the business segment in question.

Whatever the reason for the spin-off, financial executives should consider the different types of buyers that might be interested in acquiring the business division as well as deal structuring opportunities and challenges in completing the transaction.

Who is Buying?

The most obvious buyers for a corporate spin-off are strategic acquirers, preferably those who are willing to pay a premium for the synergies that can be realized by combining the division with their existing operations. The ideal buyer is a "platform buyer," who views the acquisition as an opportunity to increase revenues by leveraging the division's proprietary product and service offerings, customer base or employee capabilities.

Platform buyers tend to be more willing to pay for the synergies and strategic advantages associated with revenue growth, as contrasted with buyers that aim to achieve synergies through headcount reductions and other cost-cutting measures. In addition, a platform buyer is more likely to retain the division's employees to support the expected revenue growth. This helps to facilitate the transition and reduce or avoid negotiations regarding the assumption of severance costs.

But dealing with strategic buyers, even platform buyers, has its challenges. This is particularly the case where the strategic buyer has operations that are competitive to those of other facets of the parent company, which are not being spun-off. In addition, many strategic buyers move slowly. Prolonging the divestiture process can result in additional risks and complications, particularly where key employees and major customers of the division being spun-off become concerned about the ultimate outcome.

As an alternative, many private equity firms are aggressively pursuing corporate spin-off opportunities. Most private equity firms prefer dealing with corporate boards in a spinoff transaction as opposed to individual business owners selling their entire company because corporate boards...

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