What makes successful spin-offs

Today marks the 1st year anniversary of embecta - the spin off of BD's Diabetes Care unit. The last 365 days have been a learning journey filled with celebration, excitement, frustration and some pain. That was to be expected when you enter such a rollercoaster which a spin-off actually is. But more importantly, it is an opportunity to learn as individuals and as a new company. This is why I wanted to do a step-back, and decided to do some personal reflections but also understand from the experts what makes a great spin-off as I am still in the middle of it.

HBR analysed 350 public spin offs of more than 1B$ between 2000-2020, and found that only 25% of them delivered additional shareholder value (50% of all spin offs did not deliver additional shareholder value). McKinsey also analyzed more than 200 spin offs during a similar period, identifying that there are some critical factors that help companies achieve win-win spin offs.

Here are my top 5 take aways:

1 – Do not assume that the mere spin off on its own will create additional shareholder value.

Some companies might believe that the simple fact of spinning off from 'ParentCo' will accelerate top-and bottom-line growth. That is a trap. I would rather say that doing the spin off allows you to create a platform for growth. All SpinCo business have a current core business that they can continue to build upon, yet they still need to do something differently in order to accelerate growth. Those accelerators often do not come from the core business, but rather from identifying new opportunities. This can be going after new customer segments, accelerating new product launches, signing a partnership deal with another company in a similar space, or the obvious one, look into M&A opportunities. In the case of embecta, we have signed partnership deals with companies in the diabetes space leveraging our strong GTM presence in countries like the US, France, China and part of Asia during our first 12 months of existence. These partnerships were enabled because we had a platform for growth, and which included making our own decisions for the business.

2 – Do not be in a rush to become independent.

When you get into day 1 of the new company, the whole organization is overly excited to become independent and ‘break free’ from the ParentCo. You have a new company name, a new badge, a new logo, a new brand story - and you are excited about what the future can bring! It is a bit like being a teenager and the desire to break free from your parents so that you can ‘do what you want to do’. Just like there is a reason why most kids stay with their parents until they reach the age of legal majority (most often 18 years), there is also often good reasons why the spin off entity should continue to rely on support and service agreements from ParentCo. Most companies face a high level of entanglement between ParentCo and SpinCo. Effectively ‘cutting the umbilical cord’ can sometimes take many months, sometimes years to make sure you get it right. On top of that, in industries which have complex regulatory and legal requirements, the separation process can be burdensome and time consuming. At embecta, we are balancing the need between creating the new company, but also making sure that we separate from ParentCo at the right pace. In some of our markets, registration of products under the new company name can take up to 3 years, so until then, we will have to rely on support from ParentCo to make sure we continue to deliver our products to the millions of people who rely on our products for their insulin treatment.

3 – Always put the customer - and our people - in the center.

Whilst this is far from being a new idea in the business world, it is even more important when doing a spin off. It is so easy to get distracted by internal must do’s. We get pulled into multiple internal meetings where we discuss areas that we sometimes are not even subject matter experts in - simply because we never had to do it as part of ParentCo. This is where it is crucial to always keep a customer-centric approach to our discussions. By constantly asking ourselves: ‘What do we want the customer to see, hear, get and how do we make that happen’, we will have higher likelihood of coming out of the spin-off as a stronger company.

Whilst not an external customer, I would also say that this holds true for the internal customer = our people. People are our number one 'assets'. Always. They are the ones who will make the spin a success, or not. As we go through the transition, it is important that we clearly articulate the new direction, but also involve them in the change. As with any change, there will be bumps on the road - but being humble and open about the challenges we are facing through the change will help manage expectations. Also, the spin-off is a unique opportunity to learn and grow - and I think it is really important that managers continue to repeat this and share examples that show that this is not just a concept, but something that is happening for real. At the same time, it is also important to deliver on the table-stakes of our employees like correct and on-time pay, competitive benefits and creating a new, inclusive work environment where everyone can bring their best self to work.

4 – Being clear on the ‘WHAT’ we want to achieve is important – but even more important is the HOW.

Most spin-off companies want to show immediate revenue acceleration as they become independent. This is a sign to investors but also to themselves that the future vision (the ‘What’) of the spin-off is the right one, and that we are on the right track. However, what Bain identified, is that management teams are often less clear about how they will achieve growth. Having organizational clarity and alignment to how they will achieve business growth is crucial. Sometimes, achieving some quick wins, like signing a partnership deal or a new big contract, to show momentum is encouraged.

5 – Managing the day-to-day business and separating/standing up a new company is not a full time job - it is more than that.

With all the challenges in today's global marketplace, any business leader could argue that they have enough on their plate already. Delivering top- and bottom-line growth in a market where inflation reigns, cost of doing business is increasing, competition is upping up their game and the hunt for talent is tough - indeed, it is a full time job. For business leaders in a spin-off situation, there is more. On a personal level, I can say hand-on-heart that I have probably never worked as many hours, and as hard, as I have in the last 18-24 months since the spin off was announced internally. But boy, have I learned a lot! And I know that many of my colleagues would say the same. When I talk to my non-field colleagues, I often say that I feel like doing a '3in1' job: 1 - Deliver on the base business. 2 - Separating and standing up a new company. 3 - Hunting for new growth opportunities. Many of them nod and say that they feel very similar. Balancing what needs to be done today - versus what can be done tomorrow - is often the hardest part. Because suddenly, everything is important. You learn how to prioritise, and to focus on the things that matter. This also includes how you find your own work-life balance, how you resource yourself in order to have new energy to take on the business challenges ahead. I started doing yoga, I walk the dog, I try to get at least 6 hours sleep a day and I go to the mountains when I can to resource myself in nature. Everyone is different, and everyone has to find what works for them.

I hope you found these takeaways helpful. My intent was to show a balanced view of what it means to be going through a spin-off, because there are ups, and there are downs. Like our CEO Dev Kurdikar said recently when addressing our Global Marketing Leadership team: 'The short term pains of living through a spin-off will be outweighed by the long term gains in terms of learning and experience. Stick in there!'. And I could not agree more. It is a journey - enjoy the ride!

Would love to hear the thoughts of my embecta colleagues or from other people who are going through a spin off. Does this resonate? Any other learnings on what makes a successful spin-off?

Happy Birthday, embecta!