When a company divides its operations into separate independent entities, it can restructure by distributing its ownership interests in a ‘subsidiary’ operation as a tax-free dividend to its existing shareholders, enabling them to own or sell shares or it could directly sell all or part of the separate entities. Such a spin-off may achieve a variety of objectives:
- Revises its corporate business model through which the separate companies could better grow by rebalancing their operations.
- Sharpens strategic focus and improves performance by better aligning each of the units to focus on their respective market segments.
- Gives spin-off management complete autonomy to better manage its unit with direct accountability to public shareholders, and increases transparency of its performance.
- Provides more clarity for investors of what value these businesses could generate separately and unlock “hidden value.”
Kraft Foods’ creation of two publicly listed companies—a North American grocery unit and a global snacks business—is strategically logical given the distinct different growth trajectories and prospects of each entity. The global snack business is expected to take advantage of the substantial growth opportunities in the emerging markets where chocolate sales, particularly among other snack items, are growing at a very fast pace. The grocery unit’s growth is more muted given the maturity of the developed market, but may produce a profitable return on investment.
The spin-off of these business units will allow for their different investment priorities, enable each to separately focus resources and management talent on the specifics of their respective markets.
Will this action, by one of the largest food companies, cause other market participants to consider following suit?
- Ralcorp—The spin-off of its Post Foods business, while strategic, was executed for defensive and possibly value driven reasons.
- Heinz—Its products of ketchup, sauces, and baby food have a global presence while those of its frozen products are ‘regional.’
- Campbell Soup Co.—Its baking and snack business versus it soup, sauces, and beverages could be possibly viewed as two distinct units.
- Sara Lee—Its mature product categories in combination with the change in management philosophy brought about the divestitures and spin-offs.
The global volatility in equities that has disturbed the Standard & Poor’s 500 Index may also be a motivating factor to act now as well.
Many companies may seek the rewards of dissecting their businesses to maximize shareholder value and comb through their business for assets that they can repackage for a public offering.
Some spin-offs will make sense and make CEOs and investors happy and others may not. What do you think the future holds for spin-offs? Who’s next?
Marco V. Galante, Principal,
J.H. Chapman Group LLC
Filed under: Business strategy