Spin-Off Strategies for the Solution of Diversification Problems: A Case Study
Date Issued
2007
Date
2007
Author(s)
Lee, Yu-Lin
DOI
zh-TW
Abstract
With the trend of globalization, the business world has been exposed to greater complexity, daunting challenges and rapid changes. In the face of competition, enterprises usually have two options to choose from: one is to focus on their core business and the other is to grow through diversification, which is one of the ways in which businesses can grow rapidly and reduce risks. Despite its benefits of spreading operational risks, expanding the scope of business and creating economies of scale, diversification, especially a high degree of diversification, entails costs. When the cost of diversification exceeds the benefits, enterprises tend to refocus on their core competences, and engage in corporate restructuring so as to further elevate shareholder value.
This case study concentrated on a company which, having been established for over 20 years, has adopted the diversification strategy with a view to attaining further growth at reduced risk. The company has three main business divisions: pharmaceutical, nutricare, and derma-cosmetics. The three divisions differ in terms of business environment, sales/distribution model and management strategy. Through in-depth interviews and data collection, this study found the company to be suffering from stock undervaluation, the resource crowding-out effect, and problems related to performance compensation.
This study began with an overview of the industry the company is in, and went on to investigate the causes of the aforesaid problems, to which diversification was found to be the key contributor. Having examined the company’s diversification problems, and the existing synergies, positive as well as negative, among its various divisions, this study suggested the spin-off strategy as a possible solution to these problems.
Through spin-off simulation exercises, this study demonstrated that the use of spin-off may resolve or prevent information inefficiency the company faces in the market, thus alleviating the problem of stock undervaluation. Improved stock valuation would then help reduce the company’s funding cost in its future capital-raising efforts. This study also used the interview materials to conduct related analysis and forecast. Problems such as resource crowding-out effect and inadequate compensation programs were found to be improved by the spin-off strategy as well, which would be tremendously beneficial to the company’s long-term development. Moreover, the spin-off strategy allowed the company to remain flexible, more likely to engage in strategic alliances with other companies in the future.
Having proved the spin-off strategy as a possible solution to the company’s diversification problems through comprehensive analyses, this study proposed different spin-off options for the company’s reference. Among these options, equity carve-outs -- having the nutricare division split off and form a separate subsidiary -- seemed to be most feasible. Seeking the best way to implement the spin-off strategy, this study also proposed a specific program for the company, including details such as post-spin-off capital formation, equity planning, asset allocation, recruitment of talent and management teams, design of pension and compensation systems.
All literature in this field has shown that within a specific period of time following the spin-off, shareholders usually enjoy exceptionally higher returns. Yet on a longer time horizon, spin-offs prove to be just one of the many ways for corporate restructuring. Put differently, spin-offs are not a silver bullet or panacea for improved corporate performance and added value. A corporation’s long-term development, after all, still relies on a combination of various factors, rather than a one-shot spin-off. However, for the company in question, the spin-off strategy can indeed provide a better solution to its diversification problems, thus boosting the company’s chance of success in the market. Finally, this study concluded by rendering advice to the company about the implementation of the spin-off strategy.
Subjects
多角化問題
企業分割
權益分割
(負)綜效
資源排擠
股價低估
spin-off
carve-out
synergy
negative synergy
diversification
Type
other