8th June 2018
Spin-off for good – how to separate and restart successfully
In a market environment that has seen share prices significantly outpacing the underlying economy for almost a decade, effective ideas for further value creation are in demand. Investors and especially the likes of activists – expect a clear vision on how companies plan to continue or even accelerate growth. As in previous boom times, the conglomerate strategy is no longer seen as a security anchor, but an obstacle by many market participants. Yet, a spin-off is not a sure-fire success. To avoid any backfire this step requires a strong case for both entities. Poor employee engagement can impact the business performance. Managers better lead the pack and adopt a clear communications strategy.
On both sides of the Atlantic, numerous activist campaigns have targeted the conglomerate discount. In Europe, companies as diverse as Akzo Nobel, Nestle and ABB have been confronted with divestment demands by activists. In the USA, DuPont was faced with the claims of no less than four activists, Trian Partners, JANA Partners, Third Point and Glenview Capital – and has since changed its post-merger plans to appease the activists. The list of activist campaigns demanding corporate restructuring is growing, as are the efforts of companies to stay ahead of the curve. Even without activist pressure, a number of companies have recently announced a more decentralized approach to managing separate businesses.
The logic behind this trend is as simple as it is tempting: Separated companies with a clearly focused business are considered by the capital market to create more value than companies bound in a conglomerate. In the best case, a spin-off combined with an IPO generates fresh equity to invest into the core business. And indeed, in many situations, for example with the German energy giants E.on and RWE, spin-offs have had the desired liberating effect, stimulating value creation.
Numbers don’t lie. But they are not yet telling a convincing story on their own.
What is often catchy at the business analytics level is not necessarily supported by all stakeholders. As breaking up companies touches the interests of various groups involved, the process can ignite fierce resistance. Therefore spin-offs present unique communications challenges that, if not managed effectively, can hinder both companies’ ability to maximize value and propel their fortunes to the next level.
For the parent company, a separation can create a perception of a failed strategy with obvious strategic alternatives ignored for too long. On the other hand, the spun-off company is easily labeled a “weak spot” of the parent company, which no longer belongs to the core, slows down the group and is now to be left behind. Once this label has been applied, the new company’s chances of getting started are limited from the very beginning. Which top manager or high-potential employee enthusiastically wants to join a company with a “failed” business model? And which kind of investors will be interested to engage? And at what valuation?
For the spun-off company the perception is even more sensitive, as the rationale for the to-be independent entity will be defined on the parent company’s terms. Often the management team of the spun-off company will have to operate in its parent’s public shadow. In such situations the management team starts with a low public profile and may lack credibility with investors. This makes it difficult for the spun-off company to develop a clearly understood, compelling and self-determined strategic vision and to anchor this early on.
An inappropriate perception can also cause direct implications on a strategic level. Potential spin-off businesses can be seen as soft targets for unsolicited bids that jeopardize a structured process and increase pressure on fast sales rather than best value for both companies.
Win-win: reorientation at eye level, without losers
To stay in control, the communication strategies of the parent and the spin-off have to be aligned prior to any announcement to ensure that each business is able to achieve a “win”. The focus is on articulating a clear rationale for increasing the value of both companies – for all stakeholders. As this rationale eventually leads to separate companies it is a complex task to avoid competing narratives. The basis for every win-win situation is a clear distribution of roles and a fair partnership. The stakeholders of both companies have a keen sense of whether or not they are going to benefit.
Furthermore, the question of a fair split is also a question of leadership that crystalizes in the division of managers between the two companies. There must be no doubt that the future of individual managers lies with the company in which they can make the best contribution.
In terms of business administration, this becomes concrete when it comes to the shared responsibility for the burdens of the past. These almost always include corporate debt and pension obligations, but often industry-political commitments as well. It is crucial to present a fair solution before resistance forms.
Corporate communications has a key role to play in winning and maintaining trust for the restructuring of the company. It is their task to organize continuous dialogue with all target groups throughout the entire process, to provide transparent and rapid information and to document consistent actions of the Board.
Re-launch corporate narrative for the focused parent
The success of spin-off communications is often decided at the very beginning. The key question is how the spin-off will unlock more value for shareholders – more than it would have been possible in a conglomerate. Investors and stakeholders alike expect a convincing answer. It is of utmost importance to explain how the spin-off is consistent with the previously stated strategy. If it isn’t, there is the need to rationalize the change in a way that makes management seem in control. A weak start sets the stage, paves the way for resistance and is hard to get over. This makes the separation announcement the key event to re-launch the corporate and investor narrative for the parent company.
Set a clear roadmap
In course of the following spin-off, communicators face the challenge of maintaining a meaningful flow of communications over a long period of time. Years can go by from the announcement of the plans to completion. These plans are largely characterized by technical and formal intermediate steps. At the same time, however, attention cycles are becoming ever shorter.
Tell a convincing story
Systematic story telling is essential in order to anchor the convincing vision for both parts of the company in the public perception. To achieve this, it is imperative to actively use the milestones in the process foresighted. Over time, the attention shifts from the parent towards the new company. The most important step for the parent to anchor its story therefore is the initial announcement and the subsequent steps leading to the approval by the shareholders. Afterwards the regular financial communication supports a continuous update on the process.
Re-engage with employees
Special attention should be paid to the employees – even those not directly affected on a personal level. It is them who, with the greatest possible motivation, ensure business success in everyday working life, during the transformation phase and beyond. The carve-out of a business – often across joint teams in group functions – requires a rethinking of the corporate identity. Companies should proactively use the spin-off process as an opportunity to re-engage employees and rally them behind a new vision for the company.
Set out a distinct vision for the new standalone company
Although the spun-off business is not in the driver’s seat of the process, it is key to quickly adopt a new mind set, establish an individual narrative and therefore begin to communicate as a company, not a division. To convince such diverse stakeholder groups as investors, media and employees alike, confidence has to come from inside. Management has to lead the way and present a self-determined answer to why the new company is going to be a success. Stakeholders expect a clear message that might evolve in its details but is consistent in its direction throughout the process.
As the main public events on group level are preoccupied by the parent, it is important to identify smart measures to build corporate and management profiles. This is moving the management as the future face of the company into the focus of attention. Typically, interviews as well as speaking opportunities serve well to sharpen the profile in the intermediate phase before the potential launch of the new brand, the first individual Capital Markets Day and the start of trading eventually shift the focus and create a self-driven momentum for the new company.
A crucial element for executing an ambitious communication strategy is the availability of the required competencies to the new company. Especially if the demerger is leading to a separate listing, spun-off companies often face the risk that financial communication and IR expertise is staying with the larger group. Companies need a foresighted plan on how to build expertise and processes internally, to help the existing communication professionals to bring in their deep knowledge on the division and gain new skills required as well as to integrate newcomers in a working system.
Build excitement and identification within the new company
At the same time, employees are important ambassadors. Regional media in particular often have a close connection to the workforce. It quickly seeps into the market if the internal support for the published plans is missing. Furthermore, the spin-off decision often shakes the confidence of the employees as it puts them in an unsettled situation with significant impact on their motivation and loyalty. In a worst case scenario, spun-off companies face a combination of brain drain and underperformance in course of the demerger process that persistently forestalls a successful fresh start. Taking employees with you in such a serious process of change can only succeed if they feel well taken care of. The aim must be to avoid a vacuum of loyalty and to systematically strengthen identification with the employer of the future in order to develop new strengths.
Spin-offs in countries where employee representatives have a large say, for example in Germany, pose a particular challenge. Splitting up companies also changes the structures of co-determination and thus inevitably changes the established power structure and dynamics of employee representatives. The effects of the split-up on co-determination must therefore be addressed at an early stage in a direct dialogue before trade unions and works councils take their stance.
Use transaction to sharpen the brand, adopt best practices and leave the rest behind
In view of the strategic and operational challenges, one aspect must not be overlooked: the spin-off process is a unique opportunity to sharpen the profile of the new company. For the first time, the former business unit will be presented to the public as an independent actor. In most cases, it will receive more and broader attention in the time between announcement and listing than afterwards. So when, if not now, should the profile be sharpened and the internal identification be strengthened? At the same time, brand campaigns can carry the story from the spin-off decision of the Annual General Meeting to the successful listing of the company. In recent years, companies such as the most recent DAX entry Covestro have impressively underlined the positive momentum brand experience and corporate identity can contribute to the communicative success of a spin-off.
With the right strategy, a spin-off process offers all the options to create two strong companies with a clear profile and high impact in their respective sectors leading to the aspired value creation.
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