Spin-offs: the strategic lever to unlock hidden potential in your business activities

The creation of a spin-off typically involves dividing or splitting up businesses within a group to create new independent entities that may be listed separately. As they tap into market opportunities and continue to improve their visibility with investors, these emerging entities are positioned to activate new levers for growth and performance.

For a group, undertaking a spin-off addresses a variety of strategic motivations. What typically drives this decision is the observation of a lack of synergy between certain divisions and of a suboptimal allocation of resources. The Group may also wish to enable one of its entities to reach its full potential and grow more rapidly. Thus, each newly formed entity can focus on a specific strategy and tailored objectives, enhancing its competitiveness.

What about the potential benefits sought by companies embarking on a spin-off?

A spin-off typically involves the following steps:

• Business Plan Development for the companies involved, to help determine valuation and allocate the most appropriate assets to each entity. A spin-off auditor may be appointed to evaluate contributions from the demerged company to the beneficiary company.
• Drafting the Spin-off / Demerger Plan, which must include mandatory information as defined by the Commercial Code. The demerger plan is drawn up either privately or by notarial act and must be signed by all legal representatives.  
• Publication of the Spin-off / Demerger Notice, filed with the Commercial Court of the registered office of each of the companies concerned. It is also published in official legal notices by each of the companies.
• Convening an Extraordinary General Meeting, which ratifies the demerger. All Partners of the various companies are subject to the vote, with the understanding that the required majority is that which is provided for by the statutes of each company.
• Dissolution of the Demerged Company, without liquidation.

Laurent Guérin, Partner at Strategy& France and Maghreb, emphasizes that the goal is to create two new families and focus on the development of each one, rather than on the separation itself. It is also important for each entity to develop a competitive advantage, which will allow it to quickly stand out from its competitors and instill confidence in investors and stakeholders

At PwC, we also emphasize the importance of addressing potential employee resistance, notably by maintaining ongoing dialogue with employee representatives. Finally, it is also important not to view the conclusion of the demerger as an end, and more so as a new beginning. The company's role at this point is to be a driving force to motivate employees, markets, and attract shareholder interest. Strong communications, both internally and externally, are key to creating a positive momentum.

A spin-off is a complex operation with strategic, operational, and financial implications. Success depends on several factors.

Strategic Rationale

The strategy behind the spin-off must be clear. Why split the company?

An example could be the desire to group activities by type of issues to group together and focus on those with similar dynamics – e.g. in 2023, the Solvay Group implemented a spin-off to consolidate its specialty chemicals activities into a new company, Syensqo, with the parent company refocusing on basic chemicals.

Another strategy could be to reduce the complexity of the company's activities, or to separate non-essential activities from the core business.

In any case, it is important for the company to consider the potential impact of the split on existing activities, and to question the growth opportunities brought by the demerger. The relevance of the strategic rationale must be strong and fully justified for the market: in this respect, the mere desire to create value is not enough to motivate an entire group and engage its employees.

Legal, Tax, and Regulatory Implications

A business spin-off involves complex legal, tax, and regulatory considerations that must be carefully examined. The company must also consider all contracts that may be affected by the spin-off, such as employment contracts, supplier contracts, and customer contracts.

Operational Management Impact

What will be the impact of the spin-off on the company's operations? Are disruptions likely to occur?

It is crucial to ensure business continuity throughout the spin-off process. This continuity is a prerequisite for any value creation, providing comfort and bolstering credibility to stakeholders and the market.

People-related issues, contractual issues and IT challenges are some of the key topics which might crop up. 

Team Engagement

While it is a priority to focus on the value creation prospects of a spin-off, the human and social dynamics are often underestimated. Having motivated and committed employees is essential. At Strategy&, we believe it is crucial to develop a strong direction and rationale for employees affected by the spin-off to keep them engaged.

To overcome potential resistance and to create buy-in from the wider organization, the involvement and embodiment of the initiative from the leadership teams is crucial. Prospects for business growth and clear development opportunities for employees are also extremely important.

These key factors will enable the company to properly assess: is a spin-off the most suitable value creation strategy for our objectives? 

The success of a spin-off is never due to chance, which is why it is essential to prepare for it appropriately. Some of the most common pitfalls that companies experience include:

Sodexo-Pluxee

In 2024, catering services specialist, Sodexo, confirmed the spin-off of Pluxee, its division dedicated to meal vouchers and other employee benefits. Pluxee made its stock market debut shortly thereafter, allowing Sodexo to follow in the footsteps of the Accor group, which in 2010 separated from its “Edenred” business. Post-spin off, Pluxee is now an entity exclusively focused on a specific market (employee benefits).

Solvay-Syensqo

The aim of this spin-off was to split the Solvay chemical group into two distinct entities and list them separately. Syensqo now focuses on all specialty chemicals activities, whilst Solvay focuses on basic chemicals. This operation illustrates the competitive advantage companies can gain from separating activities that require different strategies. 

General Electrics

Completed in 2024, the spin-off of the American industry giant General Electric (GE) enabled the company to be divided into three distinct entities dedicated to healthcare (GE HealthCare), energy (GE Vernova) and aviation (GE Aerospace), respectively. The strategy behind the split was to make the company's activities more transparent and potentially more attractive to investors.

We cannot stress enough that a spin-off is not an “end” in itself, but rather a stage in a group's life. It is the transformation that comes with the initiative that will result in value creation, so rather than considering closing day as a culmination, think of it as the start of a new story.

After a spin-off, a significant challenge in the form of a contradictory injunction awaits the company: financial markets expect to quickly witness the benefits of the spin-off whilst the strategic transformation of a group tends to unfold over a longer period. It is therefore important to always maintain a 360-degree view of the issues and potential impacts of the operation. This requires a rigorous preliminary analysis and active support for the stakeholders involved throughout the project.

According to a study conducted in 2022, based on the analysis of more than 350 spin-offs between 2000 and 2020, 50% of companies that proceed with a split fail to create shareholder value within the following two years, and 25% of them even see their value decline. The study notes that many companies doom themselves from the start by maintaining a short-term vision and assuming, often incorrectly, that simply splitting the business is enough to create value. A medium- to long-term vision is favorable for any group considering a spin-off. 

To conclude, some important points to remember on this subject: 

• A spin-off can be motivated by a variety of strategic reasons. These should be positive, such as the desire to focus on the core business of the parent company or to help an entity reach its full potential. It is also important that the company shows flexibility, so it can adapt to the specificities of each project. This should be designed like any entrepreneurial adventure, with patience and determination. Flexibility and a long-term vision are essential.
• While spin-offs enjoy some popularity, they should not be considered an end in themselves. A successful spin-off creates lasting value. As we have seen, it must fulfill a specific strategic motivation, and it is not necessarily suitable for all companies.
• It is important not to view the spin-off as an exclusively technical operation, but also with a focus on people aspects. This requires being able to convince and motivate employees, without whom a spin-off project cannot succeed.
• The spin-off is not an end, but a beginning. Maintaining a long-term vision allows companies to maximize their chances of success.