Tech group spin-offs can help companies innovate, says expert

Out-Law News | 06 Oct 2014 | 4:56 pm | 2 min. read

IT businesses can improve the way they innovate if they 'spin off' parts of their business into separate companies, an expert has said.

Expert in corporate reorganisations Thilo Schneider of Pinsent Masons, the law firm behind Out-Law.com, said the drive to innovate was just one reason why technology companies might consider splitting a business unit from the rest of an organisation.

Schneider was commenting after Hewlett-Packard (HP) announced that it was splitting its business into two. HP Inc. will comprise the company's computer and printer businesses whilst the newly formed Hewlett-Packard Enterprise will consist of the company's technology infrastructure, software and services businesses.

Meg Whitman, chairman, president and chief executive of HP, said separating the company into two "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". The move will allow the businesses to compete better against competitors, deliver to customers and derive maximum value for shareholders, she said.

Schneider said that more technology companies may look to 'spin off' parts of their business in an effort to keep up with the pace of change in the market.

"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," Schneider said. "The growing cloud computing market, advancements in data analytics and a shift towards the use of mobile devices in place of other IT hardware has caused many IT suppliers to rethink how they can best serve the needs of their business customers."

"As technology companies grow into new areas beyond what they have traditionally offered there may be a resultant divergence of strategy or opportunity that can a 'spin off' company can better take advantage of separate from the main business. 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," he said.

Other factors can also drive decisions to separate business units in the technology sector, Schneider said.

"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," Schneider said.