3 keys to executing successful corporate spin-offs

close up of a man in suit and some colleagues viewing papers depicting bar graphs

I was recently at a conference featuring a CEO who had just completed a corporate spin-off. He was asked what, if anything, he would have done differently. His response? “More decision-making; much earlier.” His answer was pretty telling, and aligned with what I’ve seen through our experiences helping hundreds of clients through mergers, acquisitions and divestitures of all types. Corporate spin-offs (the formation of a new company, by selling the shares of the old company) are most successful when you do a good deal of the work up front.

With that in mind, here are three tips to successful spin-offs from our experience, which were (not-so-coincidently) echoed by the CEO who spoke at the conference:

1. Separate the population within the business units

It’s imperative to take time right up front to identify those employees (from executives to hourly workers) who are going with the spin-off and those who are staying with the parent company. From a business strategy perspective, leadership needs to segregate those people — and pinpoint who will have a foot in both organizations. The typical rule of thumb is that an employee who spends 60% or more of their time with the spin-off should go with that business unit.

HR and business leaders need to work very closely with tax and finance to determine what legal entities are involved and the best way to move people in or out of legal entities that are most advantageous for the remaining business post-spin. This is a complicated exercise that takes a great deal of thought and time and needs to be one of the top tasks to be performed. Once this step is complete, it enables and simplifies numerous other key decisions and processes.

2. Separate the HR systems within the business units

This action takes additional strategic thinking. Which HR systems (HR Information System, payroll, onboarding) are staying, and which ones are not because they’re tied to the business unit? The infrastructure staying behind will need to be rebuilt or replicated to run the spin-off.

If the systems needed to run the business aren’t going with the spin-off, it may be necessary to negotiate a transitional service agreement (TSA) until the new infrastructure is up and running. For this reason, it’s important that the parent company have a point of view on whether they’re willing to extend a TSA, as this will help determine the time needed to close the transaction. If the parent company is willing to enter into a TSA with the spin-off, they need to determine for how long, as it’s typically in everyone’s best interest to limit the duration of the TSA.

3. Understand functional interdependencies and leverage everything you can in preparation for the spin-off

In a spin-off, there are other systems outside of HR that are inter-dependent, such as finance and legal. These systems, coupled with HR systems, have to be considered at the same time to prepare for the spin off. Your HR team has to be educated about each of these, and prepare for the most complicated, worst-case scenario.

To establish the spin-off quickly, it’s advisable to use the existing benefits vendors as much as possible, so you can leverage master service agreements, focus on pricing in particular and expedite deals by leveraging your current health care provider, insurance or payroll vendors. Again, the goal is to focus on operating the spin-off as soon as possible and once this is done, the new business can take the necessary time to reevaluate the longer term HR and Total Rewards strategy.

Final thoughts

While there are obviously an abundance of administrative, strategic, financial and cultural issues to manage when preparing to execute a spin-off, keeping these three areas of focus in mind will go a long way toward a successful transaction.

Mary Chico Director of Mergers and Acquisitions at Willis Towers Watson.

Mary Chico is the Director of Mergers and Acquisitions at Willis Towers Watson.

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