‘Conscious Uncoupling’—An Intentional Approach to Split-ups Helps Companies Avoid Risk and Unlock Value
Jeff Cox Senior Partner and Global M&A Transaction Services Leader for Mercer Chuck Moritt Senior Partner and North America Multinational Client Group Leader for Mercer
eBay and PayPal’s recent split suggests that sometimes two are better than one: eBay demonstrated strong second-quarter earnings, surpassing Wall Street estimates. PayPal is also thriving post-split, with second-quarter revenue growing to $2.26 billion—a 16% increase from Q2 of 2014.
Photo: Joe Raedle/Getty Images
“Conscious uncoupling” isn’t only on the rise among celebrity power couples, it’s taking place among big brand names in the marketplace. Though the comparison may seem incongruous, both are done to avoid an acrimonious split and minimize damage.
In both cases, the split is seen as beneficial for all involved—an acknowledgment that, “Hey, we’re better off on our own.” Both share the goal of separating with the least amount of damage possible. And finally, both spark plenty of debate about whether these are trends that are here to stay.
If the market is any indication, splits don’t seem to be going away anytime soon. Split-ups and stand-ups account for much of the recent restructuring activity in the marketplace, with companies increasingly selling subsidiaries or carving out noncore businesses. We anticipate that splits and spinoffs will make up a significant portion of the $40 billion in new transactions worldwide announced recently.
How do we explain this surge in splits? A split-up or spinoff can often be the best way to accelerate a company’s transformation and unlock value.
One recent example: Lockheed Martin. While making a bold growth move by acquiring Sikorsky Aircraft (which former parent UTC had recently divested following a strategic review), Lockheed Martin simultaneously announced that it plans to divest the bulk of its IT business, either through a spinoff or an outright sale. The decision to divest was also made in pursuit of growth: Chairman and CEO Marillyn Hewson acknowledged that staying competitive in the cost-conscious IT services market had become increasingly difficult under the current business model. “Market dynamics and trends have led us to believe these businesses may achieve greater growth… by operating outside of Lockheed Martin,” Hewson said. “By separating the IT business from the rest of Lockheed they’ll have their own business structure that will help the company to compete and grow.”
As Hewson’s remarks show, in the right circumstances, splits can make a lot of sense. As companies evaluate their strategic priorities, many are realizing they may be better off operating independently as separate entities, rather than as a conglomerate.
When managed effectively, a split-up or spinoff can accelerate a company’s transformation and unlock value.
Deciding to Split: Know the Risks
While the decision to divest can be driven by the need to strategically reorganize, rebalance a portfolio, or raise capital, the end goal is always the same: maximizing value to get the best possible price.
The bad news is that it can be tricky and painstaking to separate a highly intertwined and complex conglomerate structure. The good news is that there’s significant value to be had by doing it well.
Achieving that goal, however, isn’t always easy. Companies that pride themselves on having mastered acquisitions may find themselves in uncharted territory when it comes to divestitures. Poorly executed split-ups and spinoffs can result in some real and unfortunate outcomes—unanticipated resource needs, costly ongoing transition service agreements, long and painful separations, and loss of key employees—all of which can destroy morale and damage reputation.
Getting the Most From a Split
Since most executives make this high-stakes transaction only once in their careers, getting it right is critical. Organizations that achieve successful splits do four key things:
Conduct diligence to prepare for going to market and negotiating the deal. This is crucial since it helps both sellers and buyers understand where the value lies. What impact will carving out have on the parent organization and on the entity being sold? What does this mean for both organizations in terms of infrastructure—will what worked previously still work? How will the sale of this asset affect the larger business and ongoing operations?
Have a plan. Now is not the time to be making it up as you go. As with any complex initiative, organizing the process into defined phases helps clarify the objectives, process, and actions needed to achieve the desired goals. Breaking things down into manageable steps helps define key milestones, promote coordinated action, and monitor progress.
Focus on people. Findings from Mercer’s 2015 Human Capital Risks in M&A Survey Report, which was based on responses from more than 300 company executives and analyses of 450 live transactions, underscore that successful deals require keen attention to the people-related issues. Never is this more true than in the case of a split, which often requires even greater process and rigor to handle the complicated people challenges that invariably arise:
Identifying and retaining key employees. A separation involves reconsidering organization design and how to source, and keep, talent. Identifying those key players you can’t afford to lose and creating incentives for them to stay are essential to an effective retention strategy.
Rethinking Human Resource policies. The people questions (especially in cross-border transactions) are wide-ranging and deserve careful consideration: Will the entity being spun off use the same programs as the parent organization? What type of HR infrastructure needs to be in place to ensure things are running smoothly and day-to-day concerns—like payroll, compliance, and governance—are addressed?
Communicating transparently. Spinoffs bring major change, which often means productivity loss. A clear communication plan brings the end vision to life and keeps employees engaged and focused on execution.
Get the right support. Preparing for a split is a full-time job—trying to manage the entire process internally can be counterproductive and can even undermine the deal, especially under a tight time frame and pressure from activist investors. Bringing in an experienced advisor with the right playbook can help you devise the best project management approach and marshal the resources to efficiently implement the stand-up, freeing you up to focus on transforming your business.
As the old song says: Breaking up is hard to do. However, with the right advisor and right plan in place, it doesn’t have to be. With careful planning, a strong focus on people, and the right support, organizations can avoid risk during a split-up, achieve their strategic goals, and realize greater value.
Senior Partner and Global M&A Transaction Services Leader for Mercer
Jeff Cox is a Mercer Senior Partner and Global M&A Transaction Services Leader. He has more than 25 years of experience developing and executing business and HR strategy. Jeff has worked on over 500 M&A transactions advising both private equity and strategic buyers/sellers on a variety of people issues. He has particular expertise in cross border transactions, benefits pooling and financing, sales force performance and human capital strategy.
Senior Partner and North America Multinational Client Group Leader for Mercer
Chuck Moritt is a Mercer Senior Partner and North America Multinational Client Group Leader. He has more than 30 years of experience in mergers and acquisitions and in human capital assessment, selection, and retention initiatives during transactions. A thought leader in the industry, Chuck frequently presents to various groups on topics pertinent to M&A, and he is regularly quoted on M&A issues in notable periodicals.