SPIN OFF ADVISORY GROUP
The Spin-Off Advisory Group of Houlihan Smith & Company, Inc. understands the age-old maxim that that the sum of the parts is often greater than the whole. The goal for any spin-off is to create higher aggregate value for the constituent pieces of a large organization. Diversified companies often choose to spin off parts of their business, finding that this restructuring technique creates significant value for shareholders.
Common Factors That Lead To a Spin-Off
- Parent company decides to withdraw from an industry or market
- Lack of synergies or related core competencies
- Unsatisfactory performance of the spun-off entity
- Superior margins of the spun-off entity
- Independence from parent company constraints
Why are spin-offs profitable?
Spin-Off situations can be rewarding. Investors and shareholders can often achieve superior investment performance from spin-offs for a variety of reasons:
- The business can take its natural course when entrepreneurial forces are unleashed. Management can then create accountability, responsibility, and direct performance incentives for employees.
Much of the impressive performance comes from the altered dynamics of the spun-off business and its parent. Spin-Offs do well partly because when a business and its management are freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives lead the company to greater success. Managers have greater freedom to pursue new ventures, streamline production, and pare overhead. After the spin-off, stock options can more directly compensate management. This often leads to improved operating performance.
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