Corporate spin-offs could push up RFPs

By:
Kimberley Long
Published on:

A high number of corporate spin-offs create more work for treasures, but could mean a possible influx of requests for proposal (RFPs) in the coming months.

The record high level of M&A activity in 2015 has this year resulted in a rise in corporate spin-offs. 

In looking for ways to strengthen their business portfolios, corporates have been creating work for their treasurers, and there are many potential opportunities for banks in the months ahead.

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Stephen Baseby, ACT

The reasons for corporates deciding to spin-off parts of their company vary greatly. 

Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT), says: "Each business will have its own reasons for corporate finance activity. 

"Current drivers will be cleaning up balance sheets as lenders retreat, cleaning up the remains of prior tax-based corporate structures, but also the need for management to show it is doing something when it may not have exciting markets to occupy its attention."

The decision to spin-off can be driven by the need to refocus attention on key parts of the business, in the absence of growth, with the non-core parts that do not drive substantial revenue or cost-sharing benefits to the overall business most likely to be disposed of. 

JPMorgan’s Shrinking to Grow: Evolving Trends in Corporate Spin-offs report finds that S&P 500 firms are now spinning off smaller and lower-rated firms.

Baseby says: "The main benefits are removal of management distraction on what may not be core businesses, and reduced borrowing as lenders reduce their balance sheets and regulators focus on deductibility of interest as they are in the UK."

The numbers involved are substantial. The JPMorgan report showed a strong increase in the number of separations announced by S&P 500 companies during the period of 2013 to 2015 Q1. After hitting a low of four reported separations during 2008-2009, it had risen to 15. This surpasses the previous high of 12 recorded between 2005 and 2007. 

The Edge Consulting Group and Deloitte forecast that parent companies with a combined value of $1.5 trillion would execute spin-offs in 2015. This is more than double the value of the companies that split in the previous year. 

Although it might not be the decision of the treasurers to separate out parts of the corporate business portfolio, the process of splitting apart their financials falls under their remit.

Disentangle

During the M&A process, treasurers need to merge together their existing functions with those of the incoming company. With a spin-off, they have the opposite challenge of having to disentangle the payments of the outgoing part of the business from the sections that are remaining. 

Baseby says: "Treasurers are an integral part of any business’s corporate finance team and will be engaged in detaching the exiting business and its finances from the main business. This covers the full range of treasury activity from recalibrating covenants to bank mandates."

It is likely in the first instance that many payments, cash-management and treasury procedures of the new company will be kept the same as at the parent company, including taking members of the existing treasury workforce and keeping the same banking partners.

The process of spinning off the division can be lengthy, as the change has to be confirmed with each vendor on a customer-by-customer basis. The process can take up to six months to complete in a business-to-business environment; for consumer-facing companies it can take even longer.

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Dennis Sweeney, BAML

Dennis Sweeney, treasury solutions executive, global transaction services, at Bank of America Merrill Lynch (BAML), says: "When data is migrated to a replicated system, you have to be careful that both RemainCo and SpinCo [the remaining parts of the parent company and the newly spun off division] have the relevant data and only the relevant data. It is not a simple copy job.  

"Some customers or vendors belong to one entity but not the other, but in some cases customers or vendors may overlap."

Problems can often arise and Sweeney says there is always a period of transition when receipts are still being sent to the wrong organization.

The prior centralization of large multinational companies is now creating a greater level of complexity when separating organizations. 

Sweeney says: "The more centralized an organization is, the more difficult it could be to set up a standalone company.