309. Five key moves to create value in spinoffs

So what we've seen kind of work in these instances is that you really appoint the key leaders CEO, CFO at the absolute minimum nine months before a spin because that gives them the time to shape the strategy, make some key decision, start building the organization. For McKinsey and company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Anna Mattson on the importance of timing when appointing executive roles in a spinoff. Our analysis shows 55% of large spinoffs fail to deliver value three years after the spin. And with evidence showing this trend is worsening, it raises a question, how can companies increase their odds of success? Anna joins us along with her colleague Jamie Koenig to discuss their recent McKinsey.com article and step through five critical moves spinoff leaders can make to capture the full value of the spin. Along the way, they share why the SpinCo CEO role might just be the loneliest one in business, as well as many other insights from their extensive deal experience. And now it's my pleasure to introduce Jamie and Anna. Jamie Koenig is a partner in our New York office who co leads our global separations practice with Anna. Over the past decade he's supported more than 200 buy and sell side transactions, partnering with CEOs, CFOs and their teams on complex spinoffs and divestitures. He's also a co author of our annual M and A report. Jamie, welcome to the podcast. Thanks Sean. It's great to be here. And Anna Matson is a partner in our Zurich office and co leads our global separations practice with Jamie. She has more than 20 years of M and A and separation experience and she supported more than 150 deals including more than 60 separations. Anna is also a co author of our annual M and A report. Anna, thanks for joining us today. Thank you Sean. Great to be here. So Jamie, let's set the scene. With so much uncertainty in today's macro environment, why is now the time to talk about divestitures and specifically spinoffs? Are you still seeing these types of transactions despite this uncertainty? And if yes, what's driving them? Of course, it's a great question, Sean. I actually think these moments of uncertainty when growth is a little bit harder to find are when executive teams and boards tend to turn inwards and look at their existing portfolio to seek out where they have bright spots and pockets of incremental growth. But that also leads to looking where parts of the business are perhaps hamstrung within the existing portfolio or have opportunities to create more value in A different way, perhaps outside of the company's portfolio. And so I think as we look at the announcements over the past 12 months, there's been quite a lot of spin offs announced. There are a lot going on at the moment and I think from conversations Anna and I are having, there are a lot that are also being contemplated. When we look at why executives and companies announce spin offs. When we review sort of the public disclosures of plans to spin, we do consistently see three reasons cited, which are the opportunity to have a more focused strategy for the spin off asset as well as for Romainco, with management more directly involved in a sort of narrower business business model. We also see cited frequently the opportunity to have a more fit for purpose operating model. Different businesses need different functions, different capabilities, different priorities in terms of how large or small those capabilities are. And by going into independent businesses, spin off and the remaining business, you have the opportunity to have a more tailored model. And lastly, executives often cite the ability to better manage capital. You have businesses that have different costs of capital, have different investment needs, might want to pursue M and A opportunities that otherwise don't make sense. As much as that's what's talked about and announced and is prevalent. And spin offs are year to year. Unfortunately, the research has shown more recently that not all spins are creating value. And that was one of the key insights that we learned over the past five years. There is a struggle in delivering the full potential. In the original deal thesis, we see only about 50% of spin offs actually deliver excess TSR, which we measure that by comparing to the sector that SpinCo and RemainCo are in and how the TSR performance is relative to the sector and on a combined basis. Unfortunately, over the past decade the median performance has actually been slightly negative, which compares to the sort of first decade of the 2000s where it was more positive. And that has really led us to unpacking what the difference is between those that perform well and those that have struggled to deliver that original deal thesis and the value. And those are the lessons that we wanted to talk a bit about today. So if only 50% of spinoffs are actually creating excess shareholder value, the flip side is that 50% are creating less than they should. Are you seeing specific macro trends that are making it harder to generate those excess returns from a spin? I think the macro trends that we see impacting spinoffs tend to be the same that impact overall business performance across industries. Frankly, the key lesson on spins is it's all about growth and margin the same way it's about Growth and margin for every business that's a public company or a private company. And when you do a spin off, there isn't a magic unlock. You need to do all of the activities that you otherwise need to do to accelerate growth and improve margin. Now when you do that in the context of a more challenged macro environment, obviously if there are sort of less natural levers, it can be harder to move the needle on performance relative to a more generous macro environment. Net net. Frankly, we see the overarching multiples in the stock market have a higher correlation with driving spinoff behavior because as you get to high multiples, it becomes more natural to see a larger potential unlock by doing a spin off. And so at the moment, I think that's where we're seeing the up curve of the volume of spins, which we've also seen in sort of prior cycles where multiples get quite high. Anna, anything you would add? No, I think it's. I think one of the things we see is that a lot of companies think that automatically separating, automatically spinning would automatically create value. And I think what we're, what we've learned, you know, what we see is it just doesn't automatically happen. Actually have to change a few things. Right. And we'll talk about that today around how you have to look at the strategy. How do you actually set your operating model? What talent do you need? How do you build the right culture for that company? So it actually takes some work to actually create that performance that's specific for the spin off, but then also for remain co making sure that you create a fit for purpose, be it operating model or strategy. Also for what remains, specifically if it's a bigger spin. The deal making environment does seem to have gotten more complex, especially with divestiture. So Anna, with your extensive experience on deals and spins in particular, is there anything that stands out to you in terms of how this has evolved over time? I think what's a little bit interesting is that I do a lot of integrations as well as separations. And on the integration side you've seen over the last 20 years a real capability being built in companies around getting better at M and A, getting better at doing the integrations. Right. That muscle has started to get trained, I would say on the separation side. So on the carve out divestiture spinoff side, that is not at the same level it is as on the M and A integration sides. On the buy side, there is very few companies which really truly think about doing serial divestitures, programmatic divestitures and Building that muscle. Interestingly enough though, I have to say in the last couple of years I've been in a lot of discussions and I've helped a lot of companies actually starting building that muscle and thinking through what is their approach, what do they need to do, what do they learn from maybe one divestiture to the next that they become much better and much faster at this as well. I think the speed matters is another topic we will just touch on a little bit. And I think with a lot of things going on in the regulatory environment, speed has become more challenging at times as well. So I think that is the other aspects to consider. Consider here that if I look past 20 years today, getting all of the different approvals that you need to get can sometimes takes longer as well. Understood. So perhaps it's easier for a company to think about building long term muscle for acquisitions than divestitures, but it really does seem to be two sides of the same coin and that this represents the redeployment of capital. So Anna, let's jump into what you've seen with successful spinoffs. Maybe you could take us through the five key lessons of creating value in a spinoff. So the first one looks at, you know, looking at what success looks like for a new company. We then going to talk about the operating model. Third one is all about talent. Then my favorite one, lesson number four around how do you actually create speed and why does speed actually matter. And finally the lesson number five is all around prioritizing value over process. So why don't I dive in into that first one which you know, really that first lessons learned that we have. And it's about defining what success looks like for the new company. And here's an interesting one. When we talk to executives ahead of a spin, there's one common theme that comes up and many actually feel that their current strategy is already solid. They actually say we don't really need to rethink that much here now go forward a couple of, couple of months, right? Years. But what's really then interesting is by the end of the process we actually know that 90% of them say that they've either refined or completely reset their equity story. So what that actually tells us is quite simple, right? It actually you need to take some time, step back and rethink the future strategy of the business. And that really makes a difference here. And you can do that through leadership off sites or much more structured efforts. But what you need to do is spend some time actually rethinking the strategy because once that Business is standalone and it's a public company. It's very different from having been a business unit or a division in a much larger conglomerate or company. And you get a lot of different scrutiny. Right. From investors and analysts. So hence I think one of the absolute key lessons learned here is to take a step back, reset and truly create that strategy that is fit for purpose for the company you are actually creating. So lesson one is about defining what success looks like for the spinning off company and crafting the right strategy. But before you expand on that, maybe we could talk briefly about what happens to Remain co. What are some of the strategic implications there? Absolutely. Great point. Right. Because I think our effort today is like really focused on the spinco. But here is what really also matters is and we look at performance of both RemainCo and SpinCo and there's a reason why the parent core, the RemainCo is spinning off. Right. It is to actually take. Yeah. So I think it. So when it comes to Rimenko, equally there a lot of times though that has started like this whole spinoff process. A lot of times it started with a strategy review with the focus on what's truly core, where do you want to play in future, what do you actually want to be. So a lot of times you actually see Rimenko having started that process. Where you don't see Rimenko though is thinking through, okay, once the spinoff is done, what does it actually mean for other things I need to change, how do I ensure I don't get stuck with stranded costs? For example, how do I ensure once I've exited all the TSAs that I really take a look and make sure that what started as a process, how that then ended, that I'm really fit for purpose on the strategy side as well. So. Absolutely right. I think there's really the two sides to the coin here. You need to think about what's the right strategy for what remains and what is the right strategy for what's to come. And I'll give you an example. We had one industrial company we worked with was spinning off one of their very specialized divisions and and remained was a little bit more commoditized. Now the incoming CEO of the spin off used this moment to really rethink how they could use their own balance sheet now to actually do some MA as well. Under the old structure that was really difficult for them but now they actually had a lot more flexibility as a standalone company. So they actually then actually after the spinoff actually executed a series of acquisitions that really created some incremental value for them. Similarly, on the RemainCo side, they now actually also looked at what they could do and they didn't just divest. They actually also used some of the proceeds from both the spin off and some smaller divestments they did to then actually acquire in their core competencies as well. The link to this is the second important point is to pressure test the equity story. When you've been really part of a larger group for many years, it's not that easy actually to look at the business with fresh eyes. So that's where an outside perspective can really help. And that can be investors, analysts or trusted advisors for that matter. Right. And actually what some companies also do is to bring in future board members early so they can really challenge the thinking and help prepare, you know, what are the public market expectations? How do we tell our equity story to that market as well? So I think that's really around, you know, defining what futures say. Also really pressure testing externally that equity story that it's going to hold for the new standalone company. And then I think finally strategy actually only matters if you actually also invest behind it. I just mentioned it on the M and A side. Right. And I think one of the biggest lessons learned we've had seen here is that performance acceleration has to kind of start before the spin, not after. And you need to, you know, you could actually align on three or four core critical investments that you wanted to make to really drive growth from day one. Because showing that there is growth that you're going to be driving growth is going to be very, very important, important. And to be honest, this is also the really exciting part, isn't it as well? And I think many that we talk to, you know, you spend a lot of times after a difficult, you know, in a difficult spinoff situation talking about what want, what you want to do, like figuring it out. But you actually, if you can figure that out a bit early and then kind of hit the ground running as soon as you're public, I think that makes a huge difference for specifically in gaining the confidence of investors as well as well. Right, thanks. And Jamie, how have you seen this play out? I would add one example. I spoke with a CFO who led a challenging performance post spinoff situation recently and he was sharing, look, we spent nine months thinking about what we were going to do to change the trajectory of this business post spinoff. The problem was we only started putting, putting the plan together and executing on it after we spun and it takes 12 to 18 months for that to begin to flow through the P and L. Well, guess what? 12 to 18 months later, we had our shareholders rioting and the entire management team was, was in jeopardy. We don't have 18 months post spin to see the trajectory change. It needs to happen through the process and already be in flight at the point, point of spin off. And I thought that was, that was a very important point about the difference between thinking about what we're going to do and implementing what we're going to do and that actually being in flight at the point of spin. So that my first six to eight quarters are all seeing that performance improvement that investors expect out of the gate. So I imagine we'll talk a little bit more about speed. But why didn't those companies move more quickly? It's a great question, Sean. And it's actually going to tie to both our lesson three and lesson four around talent and speed. The reality is one of the great tensions in a spin off is until the spin happens. I have a spin off leadership team that at some point I'm putting in place. But I also have the, the Remain co or the group CEO and executive team. And you begin to get into this conflict where interests diverge. SpinCo wants to make investments, begin to do things differently, set themselves up for success. Remain Co doesn't necessarily want to prioritize and fund that. They just want to get the spin off done. And so there becomes quite a negotiation between those executive teams. Now as shareholders, the interest is in value maximization on both sides, but that is a difficult piece to manage. The other complexity, lesson number four about speed is a lot of effort, focus, prioritization gets put on executing the separation, the operational separation, and that makes it very easy. This is why lessons one and two are effectively strategy and growth and cost out, because it's very easy to separate and end up with a business that is slower growing, with poorer margins. And so it is the importance of balancing growth, cost and separation as equal priorities through the spinoff process, not just getting stuck in operationally separating. Okay, thank you, Jamie. Let's turn to the second lesson, which I think is about the operating model. Would love to hear more about how you approach transforming operations within the spin. Fantastic. So one of the important levers through every spin off is rethinking the operating model for SpinCo and also for RemainCo to tackle the stranded costs. We're going to focus on spinco for a moment. Most spin offs end up being somewhere in the range of 10 to 30% of the sort of larger parent enterprise. As you go through that downscaling and reprioritization of the capabilities that matter. It's important to rethink how I'm actually going to do service and capability delivery. Right? Not every company can gold plate every capability within the organization. You want to make targeted investments in the areas that help us drive again growth and margin performance. And taking a clean sheet approach, approach or mindset to how we think about where we make those investments and prioritize is often an important lever for value that does have to be balanced with time to spin. Do I rush through spinning and then focus more on the transformation and margin improvement post spin? Do I do the two concurrently and take a little bit longer? Do I do a big transformation pre spin so that I come out of the gates with my new operating model? Or there are a few recent cases where companies have actually done M and a pre spin, increased the overall size of the enterprise and then gone out to the market. Most commonly we see this transformed through the spin being the preferred approach for larger spin offs. Where we want to rethink the operating model as we go. But it's not all going to be done. By the time we spin off, we're going to be mid flight on it. We're prioritizing the separation concurrently. We don't want to be in separation purgatory for too long. But we are rethinking how we organize the business as we go. And I think if I can just add. Right. I think one of the biggest mistakes we see companies make is create. I call them the mini me's of the big parent company or the remain cool and really duplicating a lot and not really thinking through what's truly fit for purpose for the new company. Right. I gave an example of a commoditized versus a specialized. Right. It could be a innovative pharma company versus a generic or OTC company. Right. You need very different capabilities, you need very different operating models there. But we see I think too many times this intent. It's a bit safer it feels to just create that mini me. So I think that's the biggest watch out I would have here. I imagine there are variations depending on the scenario, but is there a common approach to transforming that operating model? It varies situation to situation. Again, one of the interesting things with spins is how different each one is based on how company is set up. Today you have business units in some companies that operate almost entirely independently and in those scenarios one hopes they've actually already largely aligned their operating model to their needs. You have other scenarios where you are carving out A business that maybe has a dedicated salesforce and a few of its own manufacturing plants, but other than that it's fully entangled with the larger organization. You're actually rebuilding a lot of capabilities and functions from scratch. So it does vary in some scenarios and as is where is makes sense because I've got something usually that's largely separate already and I can just move it across. In other scenarios, we recommend going with this clean sheet design and candidly bringing in outside talent to help with that process. Because the other challenge you have is you're usually conveying and most of the talent has been part of this larger enterprise for a good portion of their career. What they know is the larger enterprise model. When I go from being part of a hundred billion revenue business to being a five or $10 billion revenue business, my model needs to look different. Unfortunately, what many companies struggle with is there is a perception that you finance, if you benchmark it as often somewhere in the.09% of revenue for many industries, that is true at $100 billion, that is true at 10 billion, that is true at 2 billion. And there is often a misconception that as I come down the scale, that percent of revenue that I can afford to spend on finance will actually go up. And it's simply not true. I have to rethink how I do my service delivery model to still meet the needs of the business, but without some of the gold platings, without some of the niceties that the larger enterprise can afford. And that is the tension that we have to navigate. Thank you. Jamie and Anna, you said the third lesson for creating value in spinoffs is all about putting talent first and building the right team. So maybe you could tell us a little bit more about how to get the people side right. Yeah, let's do that. Let's talk about talent first and how you build the team that builds the new company. So we know that great CEOs drive really disproportional value, right? Actually I think it's like top quintile CEOs create dramatically more value than everyone else combined. Right now a spinoff CEO is in a very unique situation though. And many of them, including their teams, actually are stepping into a first public facing role, right? First public company role for the first time. So that means like learning in real time to be a CEO and running, you know, something that's just been listed as well. And sometimes the CEO actually get to pick their team, but often they actually also inherit at least part of that team as well. So I think there's really three things that matter in these situations, right? It's how do you identify that right. Talent early, how do you then build the right mindset and an enterprise first mindset. And then what is a culture you want to actually create? If I talk about a bit on leadership appointments and Jamie, you mention it, right. There is a lot of tension here, right. How early can you actually appoint the CEO, the CFO and actually the executive team? You of course don't want that cost and the complexity of running two big executive teams for too long. On the other hand, you really do need those leaders to be there who are going to run that company in the future to be there to actually also really build it. And they are actually also best positioned to do that, I think. And they're going to play a key role usually in the road shows that happen around the spin, et cetera as well. So what we've seen kind of work in these instances is that you really appoint specific like the key leaders, CEO, cfo, at the absolute minimum, nine months, ideally even more than that. But absolute minimum is nine months before a spin because that gives them the time to shape the strategy, make some key decision, start building the organization. And actually I think also one of the other things besides the CEO and CFO is to think about what are other key roles we're going to need in this company. Sometimes a spin off doesn't actually have a dedicated IT team, for example, if they've been a business unit or a division. Right. But in the new company, the digital role could be an absolutely key one. So how do you ensure you recruit someone that brings that skill set? Similarly, I think the board, right. How do you actually compose that board? Setting that up again, that board can only become running and official at day one when you actually spin. But you probably do need that shadow board and a mechanism for that early on as well. Thank you. And as this team is being assembled, is there also something around building trust and mindset shifts and that broader cultural piece as well? A lot of times the SpinCo executive teams are. A lot of them are usually internal, at least to start with. Right. And as I said, many of them step into that public company role for the first time. And one of the biggest mindset shifts that need to happen here is from coming from what I would call a functional mindset. You've been running a function or business area to actually really thinking enterprise wide. Right. Being collectively accountable for the whole new company as an executive team. And that transition I don't think happens automatically. Right. You really need to deliberately use the pre spin period to actually create that one team, that one. Like how do we think about the whole company as well, building trust around that team, for example, establishing how you're going to make decisions, how you're going to work together as a team as well. I remember one CEO that I spoke to had been in that situation and he said I really thought I had that team of absolute rock stars here. But after the spin I actually realized it wasn't like that. Right. And actually within the first year he actually replaced quite a few, brought in external talent as well, had actually some step ups within the team as well because he needed a different kind of mindset from having been running a business unit to actually running a public company as well. And mainly that also then links back to the much broader picture around the culture which in spins I think is a fantastic opportunity and culture for us. Right. It's yes, it's the values, it's the, the behaviors. Right. That we wish, but it's also really the ways of working. How does work get done in the Spinco company and what good, I would say what good executive teams here do, right. They actually use the moment to actually create and co define what the new culture should look like. Maybe we are now a different type of business. Maybe we're more a generics business instead of an innovative pharma or we're a specialized instead of a. So maybe we actually need more speed, more we might be being much closer to a customer. Right. So what they do really well is they pick two or three culture shifts and start embedding them quite early in how they make decisions, how they look at performance management, really looking at the behaviors and defining what those behaviors are needed. And it's quite a nice way also to actually create that one team experience, maybe also engage the organization that's going through a spin off because there is, as Jamie also said, a lot of process and steps that need to be taken. But that cultural aspect can also be a very cohesive moment for this Binco company. So I would say as a headline here, right. I think get the right leaders in early, much earlier than you think. You probably would need to align them around an enterprise mindset and then use that moment to shape the new culture as well. And can we talk a little bit more about that board topic that we touched on? I would think that having the right strategic thought partners on the board would also be very important for the CEO of the new SpinCo. Are board members for Spinco typically coming over from Remainco or is it usually an entirely new board? What do you typically see in your experience and what are some of the challenges with either approach? Yeah, it's interesting. We actually did a bit of research on this a couple of years ago and interviewed both headhunters who were pulling together boards, et cetera. And in some instances you indeed depends a bit on the spinco type as well. You have existing board members becoming future board members a lot of times specifically in the real spin. So to say you actually start with brand new boards, which is really unique situation. Right. Because you're actually having a board come together for the first time as well. But it is a great opportunity. As I spoke to one chairman who was appointed relatively early and they knew if the spin was to happen, he would be the chairman and he was really part of bringing together his new board and he was able to take, you know, new capabilities, much more consumer centric compared to the old board that had been focused on very different drivers for that business. He was able to bring, you know, an absolutely like high caliber board together. The interesting piece is it's a new team, right? You actually, it's not just a new executive team, you also have a new board that needs to go through all the stages of becoming one cohesive team as well. But it does happen quite a bit and then a bit one of the challenges is you can't have the board fully operational, of course, for governance reasons, until they're only operational that they want. And usually also that board appointment process, it's their main code, the pan code that actually runs that process usually as well. And one of the agreements that need to be made is how do you actually operate in that time between the selection until it's actually fully operational as well. And finally it can create a bit of tension because there is naturally going to be different interests. How much does a board also get involved in finding final negotiations around, you know, call it depth and liabilities that is growing with spinco, maybe some. What are the assets that are actually going into SpinCo, etc. So I think those are rules that then also need to be defined. But it's a super interesting topic. And so do the boards prior to the spin typically serve in some kind of an advisory capacity and then flip over to being fiduciaries after the transaction? Yeah, it's a bit of like, I call it like a shadow board where they actually do advise. They get. Usually the chairman also gets involved in some of the final negotiation with Remain co in terms of what goes with the SpinCo what are some of the. You know, there's usually up until the actual spin, there's usually quite a bit. And then they need to be part obviously also of the roadshow. It's part of also showing who's going to be part of that new board in future as well to investors to gain the confidence there. Sure. And one of the board's primary responsibilities typically is selecting the CEO. So how does that work in a spin off where the board is actually initially operating in only an advisory capacity. So if you consider that at the point of spin you need a CEO, how does that end up working in practice? Great question. And again, quite a tricky one. Right. Because they aren't actually fully in charge yet, so they can't actually formally do an appointment. They tend to be involved though. And there tends to be also. There also tends to be a bit of a check. What I've seen is if there is someone who's already designated to be CEO and then the chairman comes in, there's also a bit of a check. Can the two of them actually work together? And I think that's what some companies do really well, making sure that the chairman and CEO in countries where this is separate, like different countries, different governance. Of course. Right. In some countries you have chairman and CEO being the same, but where it is separate roles, also making sure that the chemistry actually works as well. There's. But indeed once the chair is full time, it's their duty. Right. To ensure that the right CEO is in place. And you do see in some instances that there are changes to the executive team post a spin and that can have been very intentionally also set up in that way that there is someone in a role where you want that person to go through that process. Sometimes you have people who are very close to retirement, lots of experience, you know, you see them getting through the actual listing process and then maybe a year or two later there is that transition to a future leader in the business as well. Got it. So I know there are also different ways to spin and I'm curious about the continued financial involvement of Remain company and also the role that private equity might play in a spin. Can you talk about those two scenarios? No, Happy to. And I also know Jamie is. This is one of Jamie's favorite topic, the different types of spins and how long does the existing, existing shareholder, existing listing parent co stay involved? Right. So a lot of the spins that I've been involved in actually are the ones where at least for. Where there is a. Not just new shareholders come in, new investors come in but existing shareholders get a share in the SpinCo. Now the interesting piece is though they initially get this and one of the interesting thing is they might then actually evaluate as an investor, do I want to stay invested in this business or do I actually. And then there's this period where you actually need to, you know, there might be a change, right. New investors coming in as well as their investment focus might have shifted. Right. So I think that's a big task actually. If you talk to CEOs, CFOs, boards, those initial couple of months, really speaking to investors, making sure that the right investors are invested, that you have that right equity story, attracting the right investors, that is a key thing because we do see usually a hold period and then there's usually a bit of a change. Right. And you don't want to see then a big difficulty, of course, right. If a private equity comes in that's a little bit less what we've been talking about today because that's usually not when you have a full listing, a full public company, but also something which is, that is very interesting from a CEO CFO point of view, from an executive team, if I talk about the talent side of things. Because private equity companies tend to run their companies quite differently. Right. And not to talk about spins in that instance so much, but there tends to be a very big value capture focus because also quite a step up and a change in mindset usually for the CEO CFOs of how they are supposed to run, having run a business unit, how they're now going to run a private equity owned company as well. But I'll invite Jamie because I know this is one of his favorite topics. I think we could spend a long time talking about the different financial forms of spins. Look, in the US just very simply in the US we tend to see in terms of public market transactions, public to public, a lot of spinoffs because of the tax free status. So long as at least 80% of the stock is spun to existing shareholders, you avoid a tax impact that does open the door for doing a partial IPO up to 20% of the value of the spinoff. And so sometimes you see a two step where there will be an IPO that creates the public listing and then three months, six months later you have the remaining 80% of the new company spun off. But there are various, various forms. The one thing I'd love to just add on the talent discussion that I found very insightful from a number of CEOs who are in the spin off CEO role navigating the process is how lonely that role is. And actually it ties to this board discussion because part of the value of having that advisory board come in who often are ultimately put in place after the CEO is already chosen because the CEO is quite urgent in spinoffs, they can be a voice to talk to to help navigate the complexities of being a spin off CEO, where on one role you're in a CEO role and need to drive performance performance of this company that's about to come into existence. On the other hand, you are still the employee and direct report of the group CEO and you can't overrule him. And when you go to the board, you can't even. You have to navigate that with the group CEO. And so we always talk about the CEO role being lonely. I actually think the only thing that's more lonely than being a CEO of the group is being the CEO of a spin off in that interim period where you are trying to navigate what success looks like for your business but you still have a boss and you don't have direct access for the board that's making decisions that dictate your future and you don't really have a leadership team and you're just stuck in the middle. So it is worth acknowledging the challenge that comes with being in that role because I think it's overlooked sometimes. Jamie, that does indeed sound like quite a challenging place to be. And I know we're about to talk about lesson number four, speed. But before we do, I don't think we can get through a podcast in today's day and age without touching on AI. So Jamie, maybe you could talk about what role you've seen AI play in the standing up of the new spin company. It's an interesting question, Sean. I think the area we are beginning to see AI play a role is separating data and standing up systems into is a key challenge in a, in a spin off. Right? That is probably. Well, it is consistently the longest pole in the tent and we're increasingly seeing tools out there that are helping do that. Data segregation, clone systems migrate into new platforms, which is an enabler of the rest of the business getting separate because I can separate the teams. But if we're all still using the same ERP system, we're kind of stuck together for as long as that takes. So that's been the area we've seen it impact most when we think about speed overall, the key message here is faster is better. You heard me mention the term separation purgatory earlier. As long as you're separating you have people who are focused on separating and not growing or improving margin. Business success comes from growing and improving margin. And so how do we get out of separation faster is one of the key questions that we constantly push executive teams on so that we don't get stuck in separation purgatory with 100, 200, 300 people having to do double duty on something that in and of itself is not value creative. Anna, anything you'd add there? No, just on the AI point, one of the things, it's early days, let's be very honest here, right? It's very early days. But one of the things very recently I've started seeing is what used to be covered when you have an entangled function and what used to be covered often by a tsa. I'm now starting to see that there's this move away from a TSA and maybe to a AI type of solution or an outsourcer that then leverages this AI. Right. That is actually something I've seen, which is helpful for Rumenko because you're not stuck with having to provide TSAs. Am I seeing this at scale right now? No, I think it's very early days, but it is at least the discussion and the planning around it I'm actually seeing. And mainly in the kind of very standardized transactional support functions. Right, thanks, Anna. And TSAs are transitional service agreements, Right. So how long did those usually last? So TSAs are transitional service agreements that are indeed in nature should be very temporary, you know, three to max, 12 months. Some of them sometimes get extended a bit longer. But the idea is that if you're receiving a service from the group today and you don't have the ability to stand that service up by the time of a spin, you get that service provided for a certain duration of time so that you get the time to stand that up. A lot of them are usually also tied to IT systems which take a bit longer to transfer or build up in the new co. Interestingly enough, we've even seen tax free spins, right, where you want to be very careful how much ties back you have to the parent company or the ruined CO. Even there we still see TSAs. But we call them the necessary evil because neither the remain CO nor the spinCO want to be in them. And there's also reverse tsa. So you're not in the business of providing services. You want to be focusing on what the business is you're driving. Right. But they do help in that transitional period to move things a little bit faster to James point. Understood. And let's talk a little bit more about speed and the impact that this has on value creation. What typically slows things down in a spin? One can imagine, for example, that if there were a lot of entanglements, it might just take longer to spin, period. So my question is, is it speed that is this differentiator, or is it just the fact that there is that complexity? So can you carve out speed as an independent factor and how does it play into the potential success of Spinco? Let me take a stab at that one. So question is, how much work have I done before the announcement? Because some companies have done a lot of work, sometimes under the banner of a strategic review, sometimes without disclosing anything before they get to the point of announcing a spin. Now that does matter, because once you announce, you create the internal anxiety around where this is going before you announce. It's hard to get the whole engine turned on because I'm trying to keep my tent small. So there is this tension between I want to announce later when I've already done more work so that I'm not creating anxiety too soon. On the flip side, there's only so much work and so fast I can go without having everyone under the tent. So that's point number one. Point number two is. Yes. Size, scale, and level of entanglement is your single biggest driver for how long it's going to take. If I have a business unit that's operating relatively independently, I can naturally work through that much faster the more it is entangled. And operating in 100 countries, as we often tackle, I got a lot of work to do to make sure that when we flip the switch, everything is still going to work. That is the. That is probably factor number one. You do then get into some elements around financial structuring, debt structuring, timing the market. We don't like to talk about timing the market because if we could all time the market perfectly, we'd probably be retired. But there is an element of what are the right windows? Right. In the US you get into the Thanksgiving through end of the year period, things tend to slow down a bit. In Europe, August is often a more challenging month. And so there are also windows that impact things. But by and large, biggest question, biggest two questions, when did I actually start planning relative to announcement, and what is the scale and complexity of the. The separation I'm tackling? That makes a lot of sense. Thank you. And any final thoughts you'd like to share on the importance of speed and the advantage that it can bring? The. The. The the parting thought I would share is just the importance of tying this back to the concurrent priorities of growth and transformation and figuring out what the right roadmap is from the point that I decide I'm executing the spin to actually getting to that, that execution phase so that I have enough capacity in there to put together that equity story, that growth plan to think about transformation and also be ready that I'm, that I'm actually going to spin without any breakage in the system. Because it's not as simple as just saying, let's do this in four months. That doesn't really work. There is some real thinking on finding that right time horizon that is going to ensure day one continuity while also setting the business up to perform at a high level immediately after spin. Yeah, and maybe I can add there, Sean. Right. I think one of the things we see sometimes is that at a very top level, executive level, it's sometimes misunderstood or not really truly recognized the actually amount of work it takes to separate when you have a high level of entanglement. So I think being realistic and truly understanding the entanglements and what it's actually going to take, take. But I do think the trick is that early preparation and one of the key changes I've observed over the last 20 years here is that I call it the internal carve out. Starting to actually separate a business not with, you know, immediate transaction in mind or immediate spin, but actually thinking through how can we separate the long lead items specifically where we have very entangled complex setups as well. And I also said one of the, you know, I was working with one of the investment banks and they even had internal carve out as one of the options in the kind of spectrum of exits. So it's actually something that's become a lot more common. But it maybe was 20 years ago. One other thing we see here and that actually gets us to the lesson number five. And our final lesson, it's, it's really around not over indexing on process. Right. So we call it prioritizing on value, not process process when delivering the spin off. Got it. So let's talk a little bit more about that then. Lesson number five. Anna, over to you. Now. Every spin off starts with a story, right? Sometimes it's about you want to shed liabilities. It's activist pressure or it's a shared belief. And what we see is that everyone usually agrees on the value thesis of why we're doing it. But then the process itself gets a little bit in the way. Right. The preparation becomes a Check process, heavy ginormous thing rather than actually creating a better business. So you know, at the end you end up with two separate companies, but not necessarily two better companies. Right. So I think this is if there's one main message I think throughout all of this, it's how do you ensure you really keep the value focus throughout the process and don't make it become a checklist driven process in that sense. Right. So I think the. A couple of things here that I would love for the audience to take away. Right. Is first streamline and accelerate the separation. Speed matters, as Jamie said. Right. And what the best teams do is they don't just use a generic checklist or a generic playbook here. They really build a tailored plan and really focus on those questions that are going to drive true value here and where they can. It's better to execute in a fast pace, fully dedicated teams, six months, rather than prolonging it over 12 or more months. Right. And stretching it out with really diluted attention and energy. Because I think attention and energy is a key thing here. Fast decision making is a key change for speed here as well. I think the other one is really how do you actually protect and prioritize growth? Right. Separations can easily consume a whole organization. It's usually hundreds of people that are involved and they kind of push other strategic growth initiatives to the side. So what do you see successful companies do to protect their growth in terms of impact on the whole organization or even prioritization of activities, whether it's business as usual or spin related? What most effective companies do is that they set up a dedicated team, clear roles, clear responsibilities, clear decision making where decisions aren't reopened, and they focus them on the topics that matter in the separation. But they don't dilute the whole organization and bring lots and lots of people in. And they really also allow people to actually keep focus on the day to day business, running the business, because that is equally important as running the separation. But what they do well is having very clear accountabilities. They don't let a separation be run on the side of someone's desk for 5% or 10% of their time. They also don't just outsource this and let advisors take all the decisions. Right. They have dedicated leaders who own each work stream, have the ability to take decisions, have the ability to escalate to a steering committee if they need something escalated in another fast decision making, but they do ensure that the rest of the business stayed focused on the day to day. And I always say external Advisors can always support, but they should not be the one taking the decisions here. You want that future team to ultimately own the decisions and run with them because they are the one that are creating the separation and that new entity. That's. So if I, you know, so bottom line, don't let the process take over. Stay anchored in the value creation from really start to finish in the separation, because that is really what's also going to dramatically increase your odds of that. That spin actually delivers on the promise it's made from the start. Super. It's been really terrific talking through these five key moves for successful spins. With both of you, I have one last question. Drawing broadly on both of your experiences. One potential downside to leading in a spinco is that a lot of invisible scaffolding gets taken away. Brand equity scale, shared services, and even the psychological safety of being part of something bigger. So what do you see as the biggest challenge that a leader of SpinCo faces and how do the successful leaders actually address it? So I think. Great question, right? I actually. Two things to answer that question. I think the one thing is, you know, what you've always sometimes been complaining about, but the big group, the big corporation, all of a sudden you're responsible for your own right? It's your own decisions, it's your own kind of making. Right. You need that enterprise mindset. I think that is the shock, that moment of realization. We've talked about it throughout today, right? It's like you own your own destiny now as a company. But actually I would turn the question around and actually my answer is very different. What I see most is the excitement of being part of a SpinCo, of being free, I call it, of the shackles of the big corporate. Right. Of being able to design an organization, an operating model, the strategy that truly fits. You know, I go to a board meeting as a CEO, and 100% of that board meeting, it's about my company. It's not, you know, half an hour or an hour of the much broader board agenda. And the, you know, where I'm sitting as part of the corporate, there's so much more focus, focus. Right. That can be a bit scary, but it's also a huge opportunity, I think. Super. And Jamie, you get the last word. I couldn't agree more with Anna. I think in, in the vast majority of situations, it should be an exciting moment for all involved. And if the messaging is not that, the messaging is wrong, because this is a unique opportunity to be much closer to driving the strategy and creating success in a more focused business, which is a huge career opportunity for most involved. That sounds quite inspiring indeed. Anna Jamie, thank you so much for taking the time with us today. It's a pleasure and thank you to all of our listeners for joining us. We hope you enjoyed the conversation and we welcome your feedback and ideas for future podcasts. Just email us@itsrckenzie.com you can also share your ratings and reviews on any podcast player with many, many thanks to all who have already done so. We really appreciate the comments and feedback we receive every week and encourage you to keep them coming. And if you enjoyed this episode and you'd like to subscribe, you can easily follow our weekly series on any podcast player, where you can also access our entire library of more than 300 episodes. 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