Spinning Out of Control

Mark Herndon headshot
By Mark Herndon
Chairman, M&A Leadership Council
Jan 4, 2017

Trivia question: What’s the hardest type of transaction/integration you’ve been involved with? When we survey executives around the country with this question, very often the answers include: spin-offs, carve-outs and divestitures. This may surprise many, but not if you’ve done this type of deal before. The dynamics, risks and challenges of this type of deal are unique and among the more difficult we encounter.

Let me illustrate:

  • During a technology commercialization spin-off, the leadership team of the private equity-backed NewCo discovered that the legacy customer service and core operations were heavily dependent on 18 different proprietary systems or databases – requiring a much more extensive transition services agreement (TSA) and a much more difficult and expensive migration to independent NewCo processes.

"One chemical manufacturer encountered such hostility among employees ... that it nearly brought down the enterprise.”

  • During the divestiture of a product division to a new joint venture, one chemical manufacturer encountered such hostility among employees both going and staying that it nearly brought down the enterprise. Talent was “cherry picked” by the seller prior to the divestiture. Many employees going to NewCo perceived the divestiture to be a death-knell to their career. Legacy employees staying with the seller refused to support the divested business. This is often reported as the #1 failure factor of spin-offs, carve-outs and divestitures!
  • Many employees in a “take-private” divestiture, where a public company division was sold to a private-equity owner, perceived themselves to be an “unwanted asset” and considered the loss of stock-based incentives to be a substantial take-away. Others were concerned about the potential loss of transparency due to the reduced disclosure and compliance requirements.

Conversely, done right this type of deal can provide strategic clarity, focus the ability to execute a segment-specific business plan and provide superior investor returns. So what does it take to get these consistently right? The Attributes of Spin-offs, Carve-outs and Divestitures provides a quick summary of some of our thinking and experiences to help you avoid the pitfalls and stack the deck for success in your next deal. Please comment via email and tell us about your own best practices and experience.

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