Company spinoffs continue to outperform the market. The Guggenheim Exchange Traded Fund, CSD, focuses on investing in six to 30-month-old spinoff companies. CSD outperformed the S&P 500 twofold from April to October 2020 (the past six months). Does this imply former parent companies make poor decisions by spinning off high-return assets? Not necessarily.
Spinoffs provide a unique opportunity for a company to start fresh. The spinoff’s executives are no longer under the stranglehold of the mother ship and experience a sense of euphoric liberation. The liberation translates into eliminating any hints of what was previously hindering the company from decision making and competing effectively. We have worked with spinoffs to achieve outstanding results by eliminating waste, adopting fit-for-purpose ERP solutions, and only working with people who will make the company successful.
A new spinoff with eyes on success will rationalize or simplify business practices and eliminate waste. Targets for simplification include back office administrative tasks. Budgeting and reporting is usually the first target. A large energy spinoff was able to eliminate more than 100,000 hours per year by overhauling the legacy budgeting process and adopting a fit-for-purpose process. The fallout was an elimination of more than 100 reports and spreadsheets containing mounds of CYA data.
In the immediate term, the spinoff organization usually has no choice but to use the former parent’s ERP environment under a transition service agreement (TSA). One of the first priorities is to shed this expense as quickly as possible by moving to a fit-for-purpose ERP. A mid-sized oil and gas spinoff was under a $10 million/year TSA agreement for ERP and systems support. The spinoff quickly implemented the right ERP solution at an implementation cost of less than half the annual TSA support fees. The new ERP annual administrative support cost was less than 10% of the TSA annual fees. The return was less than one year.
The newly appointed spinoff executive team can be in a position to handpick management for the new company. Typically, the former parent company will first attempt to slough off dead weight and move poor performers into the spinoff organization. The shrewd spinoff executive team from a newly formed chemical company resisted. The spinoff CEO and CFO turned the tables and halted the random assignment of people and began an intentional selection process for management positions. The spinoff was marketed as an avenue for people to be a part of something new and exciting. Positioned properly, spinoffs can attract the best and brightest.
Unfortunately, the former parent company is left with dead weight. Those who administer the legacy back office functions are now doing as much work for a smaller company. The parent company reabsorbs the expired $10 million TSA charge for ERP support, and much of the excess overhead remains with the parent company. To address the dead-weight issues, the former parent company must go through some level of re-alignment. Read more about how an organization can align itself for success here.
At Trenegy, we work with spinoffs to improve efficiencies and ensure the organization is set up for success. To learn more, feel free to reach out to us at info@trenegy.com.
