By Tatyana Shumsky 

The throng of spinoffs from companies such as Hewlett Packard Enterprise Co., Baxter International Inc. and Timken Co. often masks the complex challenges finance chiefs face in the aftermath.

Global spinoff transactions reached a record $250.9 billion in 2015, nearly doubling the $127 billion in deals completed in 2014, according to Dealogic.

But there still is baggage. Companies can spend months vacuuming costly services and accounts related to the old business unit. In some cases, the spun-out entity receives support services, which prevents the parent company from moving forward completely. The remaining, smaller enterprise also must review or overhaul the process for deciding what's material to the business.

"It's a bunch of work, but in many ways, it's the most intellectually interesting corporate transaction that you do," said Martin Nussbaum, partner at law firm Dechert LLP in New York, who has worked on several spinoffs.

Hewlett Packard Enterprise added to the pile last Tuesday with plans to spin off its technology-services unit and merge it with Computer Sciences Corp. The $8.5 billion deal comes on the heels of the company's 2015 split from personal-computer and printer company HP Inc.

Timothy Stonesifer, CFO of HP Enterprise said the separation from HP prepared him for the coming spinoff of the company's technology-services operations.

"What we've learned in the last separation was how to do this, and how to do it efficiently," Mr. Stonesifer told analysts and investors on the company's earnings call last week.

The push for business separations stems from a global investor base strained by years of near-zero interest rates and hungry to squeeze greater profit from its stockholdings. Activist investors, in particular, are interrogating managers more frequently about unlocking the value of individual business lines.

Parent companies rarely get a clean break from the spinoff. The new company needs time to build back-office capabilities such as finance, information technology, accounting and human resources, and it often contracts with the parent for such services.

At the same time, these agreements often delay the parent-company CFO's cost-cutting plans and create inefficiencies such as underused assets or employees, said Colin Wittmer, leader of PwC's U.S. divestitures team.

"It inhibits your ability to manage down your footprint and skip focus to the business you've retained," said Mr. Wittmer. "You could cut a lot more heads because you would redesign the process."

Nearly a year after Baxter International completed its $17 billion spinoff of its biopharmaceuticals business Baxalta Inc., the parent company is still managing many of Baxalta's back-office tasks, such as finance and IT, said Baxter CFO Jay Saccaro. Baxter receives around $100 million a year for rendering these services.

But that cash is little comfort to a parent company looking to move forward. "The fact that we provide transition services to Baxalta does, to some extent, dictate the pace at which we can address costs in our organization," Mr. Saccaro said. "For us, there was a price to the spinoff, in addition to the one-time costs associated with establishing the two organizations."

In cases where the spinoff substantially reduces the parent company's revenues or size, the CFO must also overhaul the systems and processes to curb financial reporting risks. Limits on preauthorized expenditures for things such as office equipment and leases are reduced, prompting an adjustment in the finance department. Changes in staffing also call for a review of who can access financial information.

"You need to rejigger people's mind-sets in what they look at; you need to rejigger some of the approvals," said Robert Hirth, chairman of the Committee of Sponsoring Organizations of the Treadway Commission, the group that developed internal control guidelines used by most U.S. public companies.

Philip Fracassa made several changes to the authorization and approval process at industrial-technology company Timken Co. following its split from TimkenSteel Corp. in 2014. The Timken finance chief also reviewed the company's credit facilities.

"We had credit agreements for a $4.5 billion company, and after the spin we were a $3 billion company," Mr. Fracassa said, adding that the company cut back the credit agreement backing its accounts receivables.

Breaking out a fast-growing business unit can also change how investors and creditors view the prospects for the remaining enterprise, raising new challenges for the CFO.

Online commerce firm eBay Inc. spun off PayPal Inc. in July 2015, triggering a round of credit-rating downgrades. The $49 billion deal was the largest spinoff by value in 2015, according to Dealogic. But the ratings companies said the transaction left eBay with more debt and lower revenue.

"We believed that creating two stand-alone businesses best positioned eBay and PayPal to capitalize on their respective growth opportunities," said an eBay spokeswoman, in a statement.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com

 

(END) Dow Jones Newswires

May 31, 2016 02:51 ET (06:51 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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