Understanding The Economic Factors That Impact Spin-Off Transactions

Historically, spin-offs have created one consistent winner—shareholders. However, consideration should be given to a company’s greatest asset—its employees.

spin-offAs the stock market continues to set all-time highs, activist shareholders are encouraging large companies to maintain their focus on corporations’ core strengths. The activists believe the companies should spin off other operations to their shareholders to maximize investment returns.

Historically, spin-offs have created one consistent winner—shareholders. However, consideration should be given to a company’s greatest asset—its employees. When a spin transaction is planned, executives review the best strategies to reward, retain and incentivize those employees. Their current equity awards have been aligned to achieve past success and will be impacted by the spin transaction. Without the proper go-forward strategy and alignment of awards, a post-SpinCo’s success could be short lived.

Terminology, Methodology and Market Prevalence

Spin-offs can present a host of compensation challenges including the conversion of vested and unvested equity awards. Company management should consider the following:

  • What methods of conversion are available?
  • What have others done?
  • What factors influence equity conversion?

What methods of conversion are available?

One of three methodologies is most commonly employed when addressing equity conversion during a spin-off, differentiated by the treatment of outstanding equity awards for SpinCo and ParentCo employees.

What have others done?

Aon conducted an analysis of 53 companies across all industries and revenue sizes that had completed a spin-off since 2012.  We identified the method used by each company based upon public filings following the spin-off, and calculated the prevalence of each.

Additionally, we reviewed the market cap of both SpinCo and ParentCo on “Day 1” following the transaction.  Using these figures, we calculated the ratio of SpinCo size to ParentCo size, and studied the prevalence of each method for various ratios.

The result of our analysis is that the majority of companies with spin-offs since 2012 have used the Employee method for conversion.  This method keeps employees focused on the operations of their specific business going forward.  However, when SpinCo is larger (i.e., higher market cap ratio) relative to ParentCo the Shareholder method was used.

One possible reason for this correlation is that where SpinCo size is at least half or greater of ParentCo, employees have had a stake in building ParentCo and SpinCo, and could share in the value of what they’ve worked to build, regardless of the company for which they continue working.

Another reason could be that the growth prospects of one organization are greater than the other and employees of SpinCo may be receiving much greater potential value than if they were assigned to ParentCo, or vice versa.  Therefore, employees that helped build the company with higher growth projections could still receive value from that company.

Aon has worked with numerous organizations on spin-off transactions, and through our experience, we have identified four of the most important considerations for equity conversion.

  • Value Creation and Alignment with Shareholders
  • Tax, Accounting, and Regulatory Requirements
  • Equity Administration
  • Market Practice

Any spin-off requires careful consideration to maximize the value for shareholders and employees.  Equity considerations are just one of a multitude of decisions that have to be made by a company and its advisors. The equity conversion approach should be reviewed early in the planning cycle with employee communication and education effort undertaken to support the decision before, during, and after the spin transaction. As with many business decisions, understanding the alternatives, studying the appropriate data and reviewing how the peer companies implemented equity conversion will lead executives and board to the best results possible for their employees and shareholders.


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