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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