Four factors determine corporate spin-off success, says McKinsey

To successfully spin out a business, focus on rapid revenue growth, execution, and providing talented people with the culture that lets them get on with it. And make sure your leaders are free to focus on the big picture, not stuck down in the reeds, say management consultant McKinsey and Company.

Success, however, is never guaranteed, and may in fact be unlikely. An analysis by the Boyar Value Group in 2020 conducted during a bull market, when the temptation to spin-out can be especially pronounced, found that companies that were spun off in the past decade under-performed the S&P 500 by 2.7 per cent per year on average.

In McKinsey's new paper called Achieving win-win spin-offs, authors Jan Krause, Anthony Luu, Robert Uhalner, and Andy West reveal the results of an analysis of over 200 corporate spin-offs between 1992 and 2019 where the deal value exceeded more than $US500M.

The authors note, "Getting to a win-win outcome is often easier said than done, however. Business leaders run into roadblocks when they make critical decisions about the structure of the arrangements between ParentCo and SpinCo and the execution of the spin-off itself — for instance, defining its scope, allocating talent and resources across both entities, and dealing with capital and stranded costs."

Key factors

While achieving rapid revenue growth might seem like an obvious success factor, McKinsey says that management teams are often unclear about how to do this. "Teams should come to the negotiating table with concrete plans to create growth and value for both companies," they say.

10 largest corporate spin-offs: Source Wikipedia

Operational excellence is another hallmark of successful spin-offs. That can involve bolstering operations in high growth areas, or improving, centralising or simplifying the business unit's operational structures — often before the spin-off occurs.

Don't get lost in the reeds, especially if you are working in the spin-off, something the authors concede is hard to do in the context of executing strategy or dealing with governance and reporting requirements.

"In our experience, many executives spend more time focusing on the mechanics of spinning off units than on the opportunities that deals may unlock or communicating those potential benefits to stakeholders," they caution.

And finally, don't approach the issue of who ends up working where, as a zero-sum game. Instead,  take the time to assess the cultures and capabilities each company needs to succeed in the long term and make your judgements on that basis.

McKinsey argues that the spin-offs that outperform do so supporting the long-term growth and value-creation opportunities of both entities.