Leading Off: A leader’s guide to successfully separating businesses

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ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Brought to you by Alex Panas, global leader of industries, & Axel Karlsson, global leader of functional practices and growth platforms

Welcome to the latest edition of Leading Off. We hope you find our insights useful. Let us know what you think at Alex_Panas@McKinsey.com and Axel_Karlsson@McKinsey.com.

—Alex and Axel

What do the agenda of a typical C-suite meeting and buying new clothes have in common? The importance of finding the best fit. Business leaders are constantly evaluating whether their people, products, partners, or myriad other aspects of their companies are the right fit for their organizations. Business units are subject to the same review, and one of the biggest challenges for a company can be deciding if one of those units is better suited to another owner. If so, it’s time for a separation, which could be a spin-off, split-off, carve-out, or divestiture. These can be risky and complex transactions, but when done right, they can create value for both the organization and the newly separated business. This week, we look at the best approaches to executing successful separations.

A Big IDEA

An image linking to the web page “What it takes to make separations a competitive difference-maker” on McKinsey.com.

Be bold and work fast

Leaders often find that separations are more difficult than they may appear. That’s why experience is key, according to a survey of business leaders involved in separations. In their research, McKinsey’s Andy West, Anna Mattsson, and Jamie Koenig found that organizations that routinely refresh their business portfolios report better outcomes from separations than companies that pursue only a single separation. Speed is also essential: The companies that complete separations quickly tend to deliver better shareholder returns. Even when they’re working quickly to close a deal, leaders should be prepared to manage thorny issues that commonly arise between the existing company and the separated entity, such as transitional service agreements, talent allocation, and technology architecture. “Navigating the often-opposing interests of both sides is crucial for a smooth transition,” the authors say. “It may even be said that separations are like amicable divorces—at least until sticking points materialize.”

A BIG NUMBER

77%

That’s the percentage of business leaders who reported that their companies’ managers or boards have delayed a divestiture decision. Senior partner Andy West and his coauthors note that an ill-fitting or noncore business is unlikely to be worth more as time passes, so it’s critical to act quickly. “Managers consistently wait too long to sell assets, even as these businesses lose more value,” the authors say. “By contrast, leaders who free up capital today have more options to invest in growth priorities for the businesses where they do have the capabilities to win.”

A QUOTE

“A separation can succeed only when the strategy and vision are aligned with employees and their day-to-day operations.”

That’s McKinsey’s Anthony Luu and Dana Maor and their coauthors on the importance of focusing on people in separations. According to the authors, leaders should prioritize talent allocation decisions as they develop an operating model for a newly separated business. At the same time, it’s crucial to communicate consistently about how the separation will enhance employees’ work and purpose, which can help relieve any confusion or fears. “Companies should deliver a ‘true north’ vision that will inspire employees to get behind the change and feel connected to the work required to meet the new objectives,” the authors say.

A SPOTLIGHT INTERVIEW

An image linking to the web page “HR leaders’ role in M&A: An interview with Lisa Blair Davis” on McKinsey.com.

In M&A deals, it’s vital for the acquiring company to prioritize people issues when it brings a new business into the fold. Lisa Blair Davis, the global head of HR for Johnson & Johnson (J&J) MedTech, stresses that HR leadership needs to be involved in the entire M&A process instead of just stepping in after a deal is done. “At the 11th hour—when it comes down to closing and signing the deal—it’s always about people,” she says in an interview with McKinsey’s Andy West. During an acquisition process, Davis and her colleagues meet with the target company’s CEO to identify key talent and learn what motivates them. “We’re paying premiums because they have built things that we want to take to an even bigger scale. We need to identify those individuals who can help lead that because we don’t believe we have all the answers,” Davis says.

THE BUSINESS OF BREAKUPS

An image linking to the web page “When bigger isn’t always better” on McKinsey.com.

Let’s face it, most breakups are challenging. That can mean good business for heartbreak healers: the breakup coaches, organizers of well-being workshops, and developers of apps designed to soothe the pain of lost love. In the corporate world, breakups are a common consequence of companies’ long-running efforts to diversify in search of growth. Leaders often look to acquire or start businesses outside their core operations to create value, only to learn that bigger isn’t always better. McKinsey’s Tim Koller and coauthors say that this has fueled an increase in corporate spin-offs in recent years. “Some operational and other synergies may materialize—but eventually executives and boards realize how difficult it is to add value to businesses that have little or no direct connection to the company’s core business,” they observe.

Lead by separating strategically.

— Edited by Eric Quiñones, senior editor, New York

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