Are business spin-offs a way of creating innovation?

Upon announcement that HP would spin off certain parts of the business, CEO Meg Whitman explained that the separation “will provide each new company with the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders”.

Indeed, more companies, especially those in the tech sector, may find themselves following the above principles in an effort to keep up with the proliferation of startups and changes in technology.

“Changes in technology are causing many businesses to review their legacy IT infrastructure and consider how they can serve their own customers across a number of different digital channels,” said Thilo Schneider of Pinsent Masons.

“As technology companies grow into new areas beyond what they have traditionally offered there may be a resultant opportunity to ‘spin off’ a company. A smaller, more agile business can often respond more flexibly to market needs and demands and take decisions that reflect its own interests without having to worry about how that may impact on another part of the main business.

“Spinning off business units from the main part of a technology company may be done to find a better model for incentivising management teams,” he said. “At many small tech companies, senior staff are often offered the option of taking shares in the business instead of other bonus offerings. Share options can be attractive to staff because of the high growth that many technology companies can enjoy and so it creates a clear incentive for those staff to deliver good results for the business if they know there is a chance to sell those shares at a later stage of the company’s maturity for a much inflated rate.

“There may also be regulatory reasons why companies divest themselves of an arm of their business. For example, competition regulators may make the sale of a particular business unit to a market rival a condition of their approval of a major merger or acquisition deal a company proposes to go through with where the regulator is concerned that the merged entity would hold too much power in a market.” 

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