How Treasurers Can Navigate the Corporate Spin-off Trend
In the M&A world, corporate spin-offs are a well-used tactic at board level. For corporate treasurers, this can mean creating a fresh treasury framework for the new entity in a relatively short period of time. But by becoming involved in such a project from the outset, and being open to collaborating with internal and external stakeholders, they can steer their department – and business at large – towards a successful implementation.
Corporate spin-offs, where a company creates a new independent entity by separating part of its operations, are popular among firms seeking to enhance organisational focus and increase shareholder value. Data from Bloomberg[1] shows that, over the past 10 years, the three busiest years for deals were 2021 (with 234 different spin-offs), 2022 (232), and 2023 (211).
François Soenen, Senior Manager - Corporate Banking, BNP Paribas Fortis, observes: “It’s all about valuation and capital allocation from a corporate perspective. The sum of the parts of the group might not correctly reflect the value of the different businesses, for example.”
Company size can also be a factor. Suppose a business unit in a specific industry becomes too small. In that case, the corporate may want to carve it out of their overall operations or sell the business to a competitor or a consolidator. Another option is for private equity firms to buy a part of the company, leading the spin-off entity to become autonomous.
Get in the loop from the start
For treasurers, the prospect of setting up a brand-new treasury framework for a spin-off company can be a particularly daunting prospect. Part of the challenge is to work to strict deadlines, which are invariably measured in months rather than years. The time pressure can often be exacerbated by treasury not being brought into the project until relatively late in the day. Sometimes, M&A teams and consultants are so focused on the big picture, thinking about the value and strategic orientation of the new business, that they can neglect the operational elements such as treasury. That is a significant risk.
“The sooner that the finance and treasury teams are put in the loop, the better,” emphasises Soenen. “Ideally, this should be from day one, but that is not usually the case. Treasurers can advise on timelines and make the overall spin-off project teams aware that opening a bank account is not as easy as simply sending an email.”
Business continuity is vital for treasury, as there are multiple streams to consider, including impact on treasury, cash management, payments, funding, liquidity aspects, credit lines, bank guarantees, FX, and the trade element of the business. All those streams require preparation and they must be ready at the time of the spin-off. This also requires alerting external partners such as relationship banks and third-party vendors.
“From the bank’s perspective, the timing is also crucial,” Soenen adds. “Treasurers must understand that their banking partners are critical stakeholders to ensure a smooth carve-out, help minimise the workload and risk, and ensure the spin-off is ready on day one.”
Ensuring business continuity from the outset is essential. While the spin-off company will be autonomous and independent, it still has to pay suppliers and employee salaries, collect cash from clients, and have visibility over the new entity’s global cash positions.
Sandrine Doan-Gaudic, Head of Implementation, BNP Paribas, outlines: “To be ready for day one, the spin-off’s treasury team must set-up new systems and connectivity, an independent liquidity structure, and anticipate all the contracts signature and access rights– everything relevant to the creation of the new entity must be up and running few days before
D-Day . Ideally, all this should be ready before the launch day so that everything runs as planned when the separation from the parent company occurs.”
The preparation and transition periods are crucial. To succeed, it is vital to have a dedicated project team with a strong M&A expertise to build a treasury framework poised for action from the very start. One of the first decisions to be made is to narrow down what that framework should look like.
“The primary question we hear from our corporate clients is whether they should duplicate the parent company’s treasury framework or do something completely different,” reveals Doan-Gaudic.
If the carve-out is significant, such as 50% or 60% of the original business, it can make sense to replicate the existing framework.
But, as Doan-Gaudic notes, it is not always the best approach. “We have had some clients that wanted to do a copy-and-paste, but the business they were going to become was much smaller than the parent company, so it didn’t make sense. As a bank, we must advise our clients carefully to put them in the best position to succeed from the outset.”
For example, if the banking partner can establish an electronic banking connection for a smaller spin-off instead of a full SwiftNet implementation, that could be a better option. It is critical to understand those requirements at the start of the initiative.
“It can be difficult because the time pressures of this type of project can make treasurers instantly want to duplicate what they know into the new set-up because that’s what they are comfortable with,” empathises Doan-Gaudic. “Sometimes that works best, other times it does not, so it’s all about understanding the scope of the spin-off in relation to the parent company.”
Stick to the plan
The more prepared a corporate is for the spin-off, the better the treasury continuity will be. Factors including the size of the new entity, its level of independence, and whether it is a listed company or not are all major points for consideration at the planning stage. However, one common denominator to any successful spin-off is following the agreed plan through to the implementation phase.
Soenen explains: “During a carve-out period, corporate treasurers driving the project do not want to add any more elements than are absolutely necessary or allocate resources away from the main project into analysing processes, for example.”
Doan-Gaudic agrees that sticking to the plan helps all parties achieve their goals ahead of launch day, however tempting it might be to tinker with different parts of the treasury framework during the implementation.
“On occasion, we’ve been working with a spin-off corporate that had agreed to copy and paste the treasury framework from the parent company, but, during the set-up project, they then decided they wanted to innovate a little,” she recalls. “For example, they might ask if they can implement virtual accounts to avoid the workload and KYC of opening new accounts. But sticking to the original plan is critical to finishing a carve-out project by the deadline.”
The primary priority has to be ensuring business continuity. Treasury must be able to make payments, collect cash, and have the required reporting in place to know the business’s cash positions from the very beginning.
“Once the new entity’s essentials are up and running, treasury can think about process areas they might like to transform,” Doan-Gaudic advises.
One of the biggest challenges during the implementation period is the KYC process, which often requires hundreds of new bank accounts for the spin-off business. This is why, to help meet the expected deadlines, it is important to anticipate legal steps such as entity incorporation, directors appointments, and POA.
Soenen agrees: “The KYC challenge lies in the fact that sometimes during this process, we are moving into unknown territory where new entities have to be created, but the people that will be in charge of them have not yet been appointed. That can present some difficulties.”
Ensuring business continuity requires the spin-off’s banking partners to know which staff members are permitted to authorise transactions or make decisions regarding the bank-account structure. Indeed, carve-outs above a certain size can also trigger a full recertification of the parent company, as they represent a major change to the business.
“This can impact refinancing, or bondholders might trigger a change of business clauses, for example,” Soenen warns.
Building the treasury framework for the nascent function differs from implementing a classic cash management project in an existing business. The new initiative requires thorough scoping so that treasury and relevant stakeholders are familiar with all the elements pertinent to the project and the direction the implementation journey will take. At the start of a spin-off project, the only detail everyone knows for sure is the deadline.
Doan-Gaudic elaborates: “You have to take the deadline and plan backwards. Treasurers have to make certain assumptions, extrapolate various scenarios, from the worst to the ideal, and mitigate the risks.”
Often, this will involve treasurers preparing contracts but not knowing who the signatories will be because they have yet to be hired. They may not even know the name of the legal entity. But these situations have to be prepared for as best as possible. Project partners can assist here.
“We can start to open the bank accounts without the legal names, using codes instead,” explains Doan-Gaudic. “These can be updated before day one so that everything is in place, the cash pool has the right accounts connected with correct names, and payments have the relevant payment file with the ordering party well established, for example.”
Estimate accurately, communicate – and be open to advice
While the time pressures involved in such an activity can be intense, establishing a technical spin-off date before the actual go-live day for the new company can help the treasury prove that every process and system is working as planned within the safety of the parent-company environment.
Soenen reveals: “We certainly recommend to our clients that setting a technical spin-off date, to prove everything is working before the launch, is a critical part of the journey.”
Another challenge treasurers regularly encounter is assessing the working capital needs of the newly created entity.
“The pattern of payments and collections from clients may change because the company is now a smaller entity, the forecasting can be different, and often the people have changed,” Soenen says. “Treasurers should not underestimate the difficulty of correctly estimating the cash cycle and the pattern of disbursements, for example. That can lead to some early surprises.”
In addition to thinking outside the box, meticulous planning, and adhering to the timeline, soft skills often contribute to the success of such a project, as Doan-Gaudic acknowledges. “Communication is key,” she emphasises. “Communication within treasury, of course, but also to all the stakeholders in the project team, including the parent company and the spin-off, and also external partners such as banks and consultants.”
Given the restrictive timeframe for establishing a treasury function in a new entity, some level of advisory can be essential. For example, a treasurer might be told to implement a cash management ecosystem for a spin-off company similar to that of the parent within six months. However, that original cash management framework may have been implemented over several years, with functions such as POBO and COBO. Trying to replicate all of that in just six months is a significant challenge.
“This is where banks can help with advice and support,” emphasises Doan-Gaudic. “The treasurer will have to manage the liquidity contract, for example. At the bank, we can copy and paste that from the original, including any specific clauses, and ensure that this makes sense for the spin-off company and its external connections.”
Having a bank take care of such time-consuming and arduous tasks can save treasurers valuable time and effort. As such, it is vital to establish a trusted relationship between the bank and the corporate. At the start of a spin-off, the treasurer might be figuring out how to implement a POBO COBO structure, buy and configure a TMS, connect to the ERP and establish all the different interfaces almost simultaneously. It is virtually impossible for the treasury to complete all that on its own in such a short time. However, a strong relationship with the banking partners can help the process go smoothly and considerably reduce stress levels.
“We have the experience, built up over several years, and have a dedicated team for that,” concludes Doan-Gaudic. “Being open to this advisory approach to project management can be crucial for the success of a spin-off, ensuring that the new company’s treasury is 100% ready for day one.”
