Spin-offs – antithesis of M&As

While in the entertainment world, spin-offs are the offspring of popular shows, in the business world, spin-offs or demergers are the progeny of established companies. For hit shows, take popular characters and give them a new twist. In business, take a unit and make it a free-standing business. Both are spin-offs, but different strategies with similar intent, to enhance value.

In business school corridors, you will often hear—small is beautiful; focus helps performance. A good way to fulfil the axiom is to do the reverse of M&A and spin-off firms from the group they belong to—either as new, stand-alone enterprises or under the control of new parent companies.

The rationale varies for spin-offs. Some want to get rid of a weak-link or underperforming asset. Some want to flaunt their star, which is not believed to be getting reflected in parent’s valuation.

Reasons could be many, but many possess spin-off ambitions.

China’s famous WeChat app-maker Tencent, a $380 billion social media giant, spinning off its web music, publishing and search units to incentivize the units’ management.

Glencore, the miner and commodity trader, desires to spin off its portfolio of mining royalties into a new company to attract outside investors with an eye on an eventual stock market listing.

Historical evidence shows that whatever is the underlying motivation for spin-offs or demergers, they tend to do well post hiving-off.

Financial Times quoting data from S&P Global show that spin-offs outperform their industry peers by 8 per cent in the first year and 22 per cent over three years. This is rather contrary to M&As where post-deals, things normally slide downhill.

Not taking note of this reality will be a mistake.

Article credits: Robin Banerjee, Author of Who Blunders and How?