Unlocking Value: The High-Stakes of Navigating Corporate Spinoffs [J.P. Morgan]

Corporate spinoffs are among the most complex strategic transactions a company can undertake. In this episode, Doug Chia speaks with Rama Variankaval, Managing Director and Global Head of Corporate Advisory at JP Morgan, about the governance and strategic considerations involved in spinning off a business into a standalone public company.

The conversation explores why companies pursue corporate separations, how boards navigate their fiduciary responsibilities during these transactions, and what it takes to build an effective board for a newly independent company. Rama explains the strategic drivers behind spinoffs, from valuation pressures to diverging business models, and discusses how leadership teams must carefully design governance structures, balance sheets, and management teams to set the new entity up for long-term success.

To learn more & get resources:

• Podcast & episodes: www.publiccompanyseries.com
• Download the book: www.nyse.com/pcs

Subscribe now to hear insights from the most respected voices in corporate law and governance.

Transcript

[00:00:00] Doug Chia: Welcome to the Public Company Series podcast, powered by OnBoard: giving boards the clarity, security, and insights they need to make better decisions and deliver lasting value. I'm your host, Doug Chia. The podcast is designed to give corporate directors, executives, and governance professionals the insights and tools they need to build.

[00:00:28] Doug Chia: Boards that are agile, resilient, and prepared for the future. It's based on the book Board Structure and Composition, which is part of the Public Company Series published by the New York Stock Exchange and JP Morgan. My guest for today's episode is Rama Variankaval, who's the Managing Director and Global Head of Corporate Advisory at JP Morgan. Rama also served as one of the contributing editors for this book, helping to shape its intellectual direction, and was one of the [00:01:00] co-authors of the chapter of the book entitled, Governance for Strategic M&A, Navigating Spins and More, which is the focus of today's episode. Rama,

[00:01:11] Doug Chia: welcome. 

[00:01:12] Rama Variankaval: Doug, thanks for having me.

[00:01:14] Doug Chia: So I'll set the context for today's discussion and then we'll get into it. Public companies will spin off an existing line of business into a standalone public company for a variety of reasons. And those leading these complex transactions will need to make decisions on how the new company will be governed well ahead of the spinoff.

[00:01:38] Doug Chia: And among these decisions, how the board of the new company will be structured and who sits on that board are extremely important ones. Having a board with the right skills and experience in place from the start will be critical to the new public company's chance of succeeding. So the parent companies board is [00:02:00] faced with the pressure to get these key decisions correct, including the new leadership team, board structure and composition, executive compensation, and some of the other unique challenges.

[00:02:13] Doug Chia: All this requires meticulous planning, decision making, and execution to give the new company the best possible start. In the book, Rama and his colleagues analyze these decision points and those who are involved. Their chapter includes the role of the parent board, planning and execution, shareholder action, executive compensation incorporation, and delivering success.

[00:02:44] Doug Chia: Today I'm gonna speak with Rama about some of the issues raised in the book, and so with that, let's dive into this. Rama, maybe before we get into kind of the details of board [00:03:00] composition and structure, maybe you can give us an overview of spinoffs and why a company would want to spin off a business into a standalone public company.

[00:03:16] Doug Chia: You know, what are the drivers, what are the factors that the board is looking at? 

[00:03:22] Rama Variankaval: Thanks for having me, Doug. So spin offs, the way we think about spin offs is a, I would call it a subset of a broader category of transactions that we call corporate separations, where a larger company might separate a subsidiary business in one of many forms.

[00:03:39] Rama Variankaval: And the spin being one particular form where that business, the subsidiary business, is essentially given to the existing shareholders of the parent company in the form of a dividend. But there are other ways to effectuate a corporate separation, if you will. And then there are some differences based on the geography as well.

[00:03:57] Rama Variankaval: I think most of what we talk about in [00:04:00] the book is about US listed companies and US transactions. But of course, these things happen outside the US as well. Corporate separations themselves are a, obviously a subset of larger strategic transactions that a company might, might, uh, take on for a variety of reasons.

[00:04:17] Rama Variankaval: When it comes to separations or spins, um, the reasons, uh, can be one of many. It is, uh, often but not always driven by a parent company that also owns a business that has some distinct characters. It might be that that subsidiary business is in a line of, uh, business that's quite different from a parent company.

[00:04:42] Rama Variankaval: Maybe it's evolved in a different way. Maybe the growth profiles of the parent company and the subsidiary business start looking quite different. Maybe the margin profiles are different. Or maybe the balance sheet requirements are quite different. There are certain types of businesses that might require a lot less leverage.

[00:04:59] Rama Variankaval: There are others which [00:05:00] might be able to run with a lot more balance sheet leverage. And to have both of those types of businesses on a single parent balance sheet might be difficult in some instances. So these can be some reasons why a company might decide that a, a subsidiary has better prospect as a standalone company rather than being a business unit

[00:05:21] Rama Variankaval: within a larger company, occasionally, the reasons, again, valuation always matters, right? Market valuation is often a signal from the market to the company about the need for an action. If a company is trading at a, let's say, a discount to its peers, it's essentially the market telling the company that perhaps there are, you know, things to consider, things that can be done differently.

[00:05:45] Rama Variankaval: Sometimes the separation might be the answer,. Sometimes it's driven by active shareholders. Might come in and again, they might highlight one of these same issues that you parent company own assets that don't really belong together, or one's overperforming versus the other, [00:06:00] or one can be leveled a lot more than the other, etcetera.

[00:06:03] Rama Variankaval: So a few different motivations. Um, and again, the mechanics of doing the separation, as you said before, can also follow a few different pathways. 

[00:06:11] Doug Chia: And so it seems like people talk a lot about the sum of the parts analysis and all of that for conglomerates and there's often calls for, uh, some kind of a breakup or spinoff by analysts or, uh, activists, but the company's almost always resistant to this kind of idea.

[00:06:33] Doug Chia: Um, and they say, okay, we, we have our own reasons for staying together. Yes, we know we traded at discount, but synergies, etcetera. And so, in your mind why management and boards of company, they have a kind of a knee jerk reaction to the idea of a spinoff. I mean, sometimes they, they decide on their own, but a lot of times it's because of pressure and they, you know, they think that [00:07:00] these people are wrong.

[00:07:01] Rama Variankaval: The word conglomerate or the term conglomerate I use in a very specific sense, which is really a holding company that owns businesses that are in very distinct sectors, and there might be reason for why that combination of assets make sense. Conglomerates are far more common in other markets, uh, relative to the US and the reason we will establish that conglomerates had a discount to the sum of the parts.

[00:07:27] Rama Variankaval: The vast majority of corporate separation activities that we focus on in the US is really not within conglomerates. It's with just large companies, typically. Mid size of large companies that have multiple business units, where there might have been at one point a very strong reason to keep them together. Maybe one unit actually grew out of a parent business.

[00:07:51] Rama Variankaval: It's possible that the industry trends have evolved in such a way that the path of these business units has kind of start to diverge. But there was [00:08:00] some reason to have them together at some point in time. Maybe there are shared services, maybe one is actually a customer for what the other business unit pick, et cetera.

[00:08:09] Rama Variankaval: And so there might have been strong reasons. That's usually the starting point, um, when we get involved. The specific question you're posing, why do management teams resist? There is, look, there is often the management teams have the memory of why these business units belong together. They also know the interdependencies better than the market can ever observe from the outside, the synergies that might exist, the resource sharing that might exist, the real estate sharing that might exist, the IT systems, etcetera, right?

[00:08:44] Rama Variankaval: So there are lots and lots of things that the outside market may not be able to grasp that the management knows, and the management might realize that to actually do a separation might be more complicated than looks obvious from the outside. [00:09:00] So that's usually the reason why a management team might resist.

[00:09:04] Rama Variankaval: Management teams might also have a view that they have a business plan in place that can solve whatever the, let's say, issues markets are pointing out. If there is a valuation issue the management team might create, like they have a, a plan in place that actually maximizes value of the company as it stands today

[00:09:23] Rama Variankaval: and separation is not necessary. And keep in mind, separations, spinoffs or otherwise they're complex transactions. Right? There are clearly sector and strategy related questions to be answered. There are balance sheet and credit ratings related questions to be answered. There are tax and accounting questions to be answered.

[00:09:44] Rama Variankaval: There are shareholder communication and narrative and story building aspects. It's lots and lots of things that need to be sorted out to actually to do a separation. And so this is not a decision anybody would want to make lightly, and we would [00:10:00] never recommend anybody make it lightly, so any transaction that we contemplate can actually improve on status quo, and that's the right question to ask.

[00:10:10] Rama Variankaval: You don't want to start on a path if you don't have conviction that the path will lead to a better outcome for everyone involved. 

[00:10:17] Doug Chia: So today we will talk about a spinoff into a separate public company. Of course, there's spinoffs into private companies. There's spinoffs that get bought by private equity, whatnot.

[00:10:27] Doug Chia: But in the book, you talk about how when a company decides on a separation, the outcome is often an independent public company created from scratch and one of the big. Considerations or things that they have to prepare for is the fact that this new company has never existed as a standalone public entity before.

[00:10:48] Doug Chia: They're probably part of a, a large public company, but, but not, not an actual standalone. And so why, why does that matter as opposed to spinning off into [00:11:00] the private world? 

[00:11:01] Rama Variankaval: Being in the public world versus the private world are quite different experiences for everyone involved. And the idea that you have to now start from a clean sheet of paper and think about a variety of decisions that need to be made.

[00:11:17] Rama Variankaval: How does the balance sheet look like? What assets get transferred? How do you draw the parameter of the business that is going to be transferred to the spinco? How do you think about the right amount of debt? How do you think about other types of liabilities that might be belong here or there? Right? So how do you actually start from scratch and a portion of the assets and liabilities of

[00:11:35] Rama Variankaval: the business is a very involved exercise, so that takes a lot of time in terms of personnel involved. Typically what happens is the individuals who are business leaders of that unit within the parent company tend to become, uh, executives of the standalone public company. When the spinoff is, uh, completed, not always but [00:12:00] often

[00:12:00] Rama Variankaval: these individuals have not had the experience of being public company CEOs or public company CFOs or public company, head AR etcetera. Often it is the first time they're facing off public investors, and so that's, again, it's a different ballgame. While they might be very, very competent in understanding their business, the dynamics are driving their business success.

[00:12:23] Rama Variankaval: Interfacing with the public markets? How do you communicate? What's the right thing to highlight? How do you, what's the cadence of giving, you know, the strategy updates? What are the right things to highlight, what not to highlight, etcetera. This all takes great amount of work. So as I said, right? Going from zero to now, creating a public company

[00:12:47] Rama Variankaval: uh, that gets spun off, it's quite an uninvolved exercise. 

[00:12:50] Doug Chia: Yeah. A co I guess a couple of other things are also the, um, there's a regulatory regime that you have to comply with and that can really [00:13:00] affect the way you run the business. And then there non-regulatory things, pressure from the market to do, uh

[00:13:06] Doug Chia: quarterly earnings reports, quarterly earnings calls, maybe even guidance and that kind of stuff. So those are kind of unique considerations. 

[00:13:16] Rama Variankaval: Absolutely. The regulatory compliance requirements of being a public company are quite high, especially in the US markets, and to again, go from not having done that, to having to have to do all of that.

[00:13:32] Rama Variankaval: It requires a fair amount of thought process, training the right people in the right seats, et cetera. 

[00:13:38] Doug Chia: You know, in the book you also say that the board in this process of the spin must navigate its fiduciary responsibilities carefully through the transaction. What do you mean by that? Are there ways in which the board's fiduciary duties change or are there, you know, certain issues that [00:14:00] kind of really come to the forefront more than others?

[00:14:03] Rama Variankaval: For a public company, the board has a very high degree of responsibility and anytime the company is going through a strategic transaction, there is increased focus on the role. Right? Clearly that's the case. In a corporate separation, there are a couple unique features that kind of, you know, add to the already elevated sense of responsibility.

[00:14:25] Rama Variankaval: I would say one is before the spin is actually affected you are the com the management by the way as well, and the board have to make many decisions. As I said, you have to think through what are the, what's the parameter of the businesses that we are going to carve out and put in this new company? How we going to allocate liabilities within the parent and the the new company?

[00:14:47] Rama Variankaval: If there are non debt liabilities, let's say there was a defined benefit pension plan. How do you think about carving up that if you're operating leases, if you have a headquarter building. Or you are [00:15:00] in a sense making these decisions for what are going to be two independent entities. But you're doing all of this before the second entity is actually created as a public company.

[00:15:11] Rama Variankaval: So there is an added sense of, uh, uh, fiduciary responsibility. You have to make these decisions keeping in mind the interest of both sides. Keeping in mind that you are trying to set both companies for future success. And there are definitely examples. Again, hindsight is 2020, of course, where some of these decisions were perhaps not appropriately calibrated

[00:15:33] Rama Variankaval: and what happens is one of the two entities may end up having more liability than they can handle. They're overboard with certain liabilities and they're unable to handle that and then end up being in financial distress. So there are several such examples of things having gone wrong. So you have to kind of have the history and the knowledge of all of that and bring it to bear.

[00:15:57] Rama Variankaval: When you're making these decisions, again, you're making [00:16:00] decisions for essentially two different companies before the second company actually exists. 

[00:16:05] Doug Chia: That makes it different than just a private company. It, it's not exactly like an IPO where you have a private company becoming a public company and they have to think about all the, a lot of the same kind of things.

[00:16:19] Doug Chia: But so you're saying that this is a lot more complicated because it's uh, you know, yeah, one becoming two and both becoming public companies.

[00:16:29] Rama Variankaval: In the spectrum of transactions that we get involved in as bankers, I would say corporate separations are probably on the closer to the highest end of the complexity spectrum because of all of these certainly, you know, there are other kind of, you know, capital markets issues, tax issues, et cetera as well.

[00:16:47] Rama Variankaval: But this issue of trying to create these two companies from one with the objective that when these two are separated and are now trading us two [00:17:00] independent entities, if you add back the value created that's higher than your starting point. That is of course the ultimate goal, right? That the value of the parent company and the spun off entity post separation is higher than the the parent company pre separation. Right?

[00:17:18] Rama Variankaval: So to be able to get to that goal, you have to very carefully calibrate a number of things. These tend to be fairly complex transactions, and so they're not the most common either. I would say in 2025 we have probably seen a bit resurgence in number of these transactions in the US, but we are still talking maybe two dozen such transactions.

[00:17:42] Rama Variankaval: In the mid, you know, the middle or large end of the spectrum in the US which is obviously a relatively small number compared to other types of strategic transactions. 

[00:17:52] Doug Chia: And I guess the regulatory process would be slightly different. Is that right? 

[00:17:58] Rama Variankaval: It could be. 

[00:17:59] Rama Variankaval: There are [00:18:00] obviously disclosure requirements that you have to follow through.

[00:18:02] Rama Variankaval: There are fairly elaborate tax requirements. Um, again, for the most part, these corporate spinoffs can be done in a tax-free manner, assuming all the obviously steps are done carefully with the right motors and the right um, uh, procedure. But then you have to follow all the steps very carefully. And then depending on the sector, there might be obviously other regulatory issues involved as well that you'll have to go through.

[00:18:31] Rama Variankaval: So again, these tend to be transactions that require multiple dimensions that we have to put a work stream on, make sure that we are following all the, the appropriate steps. 

[00:18:41] Doug Chia: Antitrust must come into play in some situations in terms of competition, which also then affects who can be on the board of each company 

[00:18:51] Rama Variankaval: it does.

[00:18:52] Rama Variankaval: So antitrust, of course, you know, you can't have individuals sitting on, um, the boards of two companies that compete with each [00:19:00] other. That would be a violation of antitrust. We have to be careful of that, but it's very rare for a subsidiary within a parent company to be competing directly with the parent company.

[00:19:13] Rama Variankaval: But again, you know, antitrust is something we are, you know, we have to review. No doubt about that. 

[00:19:17] Doug Chia: You know, in the chapter you talk about how a spun off entity's board needs to be built out. It's not just kind of like, all right, we already have one, it just kind of moves with the new company and that obviously, you know, the board who's on the board and their skillset has to be tailored or has to be consistent with what the new company's

[00:19:41] Doug Chia: business is. You also point out that the formation of the new board is an opportunity to incorporate directors with experiences in new trends like artificial intelligence, uh, that are likely to impact any business, and I think there's a huge [00:20:00] point here, um, in terms of adding new directors with, uh, kind of forward thinking skills and and backgrounds.

[00:20:10] Doug Chia: What have you seen from boards that have done this particularly well? 

[00:20:16] Rama Variankaval: Making sure that the board has the right experience and expertise is something every public company should think regardless, even in the absence of a strategic cap, action. Spins are again unique because it's, again, you are starting from scratch you have to put a board in place, but it's an opportunity.

[00:20:35] Rama Variankaval: If you look at the data again in the US context, it is common for the spinco board to inherit one or two members from the parent company's board for some period of time. So some amount of overlap is common, but eventually the overlap goes away. The market expects, again, the market wants to see independence.

[00:20:57] Rama Variankaval: The market wants to judge the [00:21:00] spun off entity as a standalone public company. So the overlap is, is not something companies want to overdo, but it's helpful in the, in the short term. For the rest of the board, again, it's a fantastic opportunity. Right? Again, if this spun, spun out entity is in a business that is distinct enough from the parent company, it might require a very different type of board.

[00:21:23] Rama Variankaval: The type of expertise you need on the board might look different. And then again, you know, things like what's emerging. I think you mentioned AI. AI is absolutely something that impacts almost every sector, if not every sector. And so having someone who can guide the management team on emerging trends like AI is critical.

[00:21:45] Rama Variankaval: It's also critical, by the way, to have people on the board who have worked with public companies to use. That's again, the mentorship role they can play is also quite critical. So again, it's an opportunity to craft a board that checks all [00:22:00] of these boxes and provides the management team with the support that that they need.

[00:22:04] Rama Variankaval: Assuming that the management team is largely first time public company manager. Again that's not always the case. Sometimes the spun out company might actually hire a CEO or a CFO from other public companies so they bring in their own experience. But about half the times, or I would say two thirds of the time, it's usually not an external CEO.

[00:22:23] Rama Variankaval: It's CEO that used to be the head of the business unit within the parent company. Typically they don't have public company experience. 

[00:22:31] Doug Chia: Yeah, and I, I guess, you know, for any board, part of their role is to be strategic advisors to the CEO and there's always some coaching that goes along with that. And that's why you have experienced CEOs or former CEOs on the board.

[00:22:48] Doug Chia: And so in this situation, there's kind of a heightened sense of that, that, that this new CEO is likely gonna need more, uh, not handholding, but uh, some [00:23:00] direction in terms of how to, how to be that. 

[00:23:02] Rama Variankaval: Right. 

[00:23:04] Doug Chia: And so you talked about overlap being common, um, in terms of at least for the first maybe few years, you have a couple board members in common, and is this largely, I guess this is largely just for kind of for transition purposes?

[00:23:22] Rama Variankaval: It can be for transition purposes. Again, it can also be that, and it's not uncommon that the two businesses have some overlap. Maybe the businesses were not exactly the same, but there was some overlap. So there might be board members who actually have something to offer the spun out company, even in the long term.

[00:23:44] Rama Variankaval: They may be experts in a certain area, they might have the network, the experience, etcetera. That, that's her fact pattern as well. But more often than not is it's for the transition purpose to make sure that there is some continuity. Some, you know, [00:24:00] not every decision needs to be re litigated just because you have a entirely new management team and board.

[00:24:05] Rama Variankaval: Someone is there to provide kind of the history, the background, and the logic for decisions made and some amount of continuity. 

[00:24:13] Doug Chia: And then when we talk about, you know, this transition being, uh, you know, relatively short period, and I'm sure there's some kind of, you know, flexible standards out there for this at the end, are we talking about directors who

[00:24:30] Doug Chia: kind of, you know, they almost like they were borrowed for a while from the parent company, they stay on the parent company's board, but get off the new company's board? Or do they, are there directors that kind of just move with this spun off company or people that are just, you know, after this temporary period

[00:24:49] Doug Chia: they just, you know, they retire, they go away?

[00:24:52] Rama Variankaval: Uh, all of the above. So you can find data for all of the fact patterns folks who transition to the spin out or a [00:25:00] spinco and then stay just to the spinco. They transition role and then retire, or, you know, step out from the uh, spinco board and then just maintain the seat in the parent board.

[00:25:11] Rama Variankaval: There are examples of them all, and again, every situation is different. So I, I would not want to lay out a template each, each. Again, the key is to make sure you have the right experience and the right profile of board members that is best fit for the business geography, the strategy that the spin, spin out company.

[00:25:31] Doug Chia: You also say that the overlap of directors may present other problems. Um, you know, we just talked about the benefits. What would be the problems of an overlap, you know, beyond other than, you know, they, they're just there too long. 

[00:25:48] Rama Variankaval: One of the litmus tests, if you will, or the of the public markets, is to see if this spin out company has what it takes to be a standalone public company.[00:26:00] 

[00:26:00] Rama Variankaval: Is really the biggest quest that the market has. So the sooner you can present evidence that in fact the Spinco has what it takes to be a standalone public company, the better. So that, again, the board is just a piece of the puzzle. There might be other things, the spinco is to sharing real estate with the parent, or there are other types of shared services agreements, etcetera.

[00:26:25] Rama Variankaval: All of that is fine on the day of this, uh, of the separation. But eventually it's important to demonstrate that the Spinco has what it takes to be a standalone public company. So I, I think it's really a, a demonstration to the public markets that you are, you know, you are as good as any other public company, even if you, the way you became a public company was not through an IPO process, but through this corporate separation.

[00:26:53] Rama Variankaval: So I think that's really the biggest consideration. 

[00:26:55] Doug Chia: So, who gets involved in the [00:27:00] decision of who is going to be or might not be on, uh, the spun off company's board?

[00:27:08] Rama Variankaval: Clearly the, obviously the parent company board has a say,, but the newly created management team have a say. There is no question about it, right? The CEO and the, the executive team will have a say. The parent company management team might have a say.

[00:27:21] Rama Variankaval: So it's again, a decision that is, uh, formed. And the advisors, as advisors, we, again, we don't have a say, but we might have suggestions, uh, on who we have seen, who can actually add value to the board in any given sector, in any given situation. The lawyers involved might have recommendations. There are obviously specialist executive search firms who might have a roster of, you know, eligible board candidates.

[00:27:49] Rama Variankaval: So it's the, the process can be, can take a long time. And again, the thing about spins is there are usually 16, 18, 20 processes all happening at [00:28:00] the same time in parallel and filling out the management team is one, filling out the board is another. 

[00:28:05] Doug Chia: Yeah, it,, uh, you know, takes a village or whatever kind of analogy you want to use.

[00:28:10] Doug Chia: Um, but it's not just the parent company saying, okay, we decide how this spinoff works, works out. It's the new management team needs to be comfortable. Um, all of those kind of things. 

[00:28:23] Rama Variankaval: To guarantee success, yes. 

[00:28:25] Rama Variankaval: Are there examples where decisions are made by the parent company almost exclusively? There are.

[00:28:31] Rama Variankaval: Are those the best in class transactions? Typically not. Right? If you want to set up both companies for success, uh, I think involving the management team of the spinco is absolutely critical. 

[00:28:44] Doug Chia: One thing that you say in the book is that, um, the requirement for financial expertise on the separated entities board is increased.

[00:28:56] Doug Chia: Um, and so why would that be? Why, why is this [00:29:00] a heightened issue in constructing a board for a newco? 

[00:29:03] Rama Variankaval: I would 

[00:29:04] Rama Variankaval: maybe make two somewhat distinct points. One again, is back to the point that again, you're starting from scratch. Typically, financing decisions are incremental. Refinancing debt that's coming due, issuing equity to an acquisition, etcetera.

[00:29:21] Rama Variankaval: Right? So these are often incremental decisions that typically, if you're a large company, maybe is done at this CFO level. In a smaller company, perhaps, you know, the CEO and the board might get involved. But when it comes to a spinco there is not an incremental thing. It's a first time thing. Right? The bond issuance is a first time bond issuance. And having, again, back to the point that you want to have, of course you'll have a competency of four competent capital markets team, etcetera, but to have a board which has some experience with capital markets and financings and [00:30:00] be absolutely useful in that case.

[00:30:01] Rama Variankaval: So that's one argument. The second, which applies not just to spincos or separations, but more broadly is I think the, the patterns of capital formation are evolving faster now than at least I've ever seen before. Whether that's public market versus private market capital formation, whether it is trade equity or structured equity, whether it is US versus Europe versus Asia versus Middle East, right?

[00:30:29] Rama Variankaval: There are lots of things that are happening all at the same time, which just means that having a little more sophistication around the capital markets and patterns of capital formation are very, very helpful. Make sure that the cost of capital for this company can be optimized and the access to capital can be optimized.

[00:30:50] Rama Variankaval: So I, I think in general, having more financial value on the board, I, I feel is more important now than ever before. But then when it comes to the specific type [00:31:00] pattern of a newly established spinco, becomes even more critical. 

[00:31:03] Doug Chia: You 

[00:31:04] Doug Chia: know, you talked about activism before, being sometimes a driver of this, um, or even kind of the staving off the threat of activism often can be a reason or part of the reason companies spin off a business.

[00:31:21] Doug Chia: And so a spun off company could be like this fledgling company that's attractive for activists to pick off. And so you talk about how sometimes in a spinoff, it's an opportunity to establish a classified board, um, sometimes referred to as a staggered board where companies, directors serve. You know, there's different classes each with different terms, uh, term lengths.

[00:31:47] Doug Chia: And this is a widely considered activism defense tool. And you say as well as to promote effective corporate governance. But this is a pretty controversial thing these days. [00:32:00] What are the arguments for doing this particularly at this point? 

[00:32:04] Rama Variankaval: I would say, first of all, look, there are some corporate separations that are, in fact, I guess more defensive in, in terms of because there's an activist or because there is a threat of activism,

[00:32:16] Rama Variankaval: the company decides to separate an asset. Then obviously that fact pattern does exist. But by no means is that the primary or definitely not the only reason companies do separations. It's sometimes it's quite the opposite. They might, companies might decide that they have an asset, a subsidiary that has really strong growth potential and having its own public currency will actually turbo charge their ability to grow the business.

[00:32:46] Rama Variankaval: And so that might be the reason, right? So can be many different reasons. Um, as we talked about before, it is quite important to this company is, you know, again, you are going from [00:33:00] nothing to a fully formed company overnight with a balance sheet, with, you know, a business plan, with a new management team, board, etcetera.

[00:33:09] Rama Variankaval: The critical thing, first of all, all these decisions about how you set this company up on day one are critical, no doubt about it, but beyond all that, the company needs time to prove itself out in the market. That it can in fact deliver on the business plan that it was articulating when it went public. That in fact the management team is competent to deliver against their strategies.

[00:33:31] Rama Variankaval: Right? So the benefit of having that time is very, very important. And so the, the, and you would also like to point out that if I was an activist investor running a screen, a newly formed public company might actually get picked up more often than not because there is no track record. Might seem like it's off to a slow start, etcetera, right?

[00:33:55] Rama Variankaval: It might seem like the management team is relatively new, so [00:34:00] depending on what screen you're running, it is likely you pick up these companies and it may feel like they are quote unquote, easier targets to offer. So steps to make sure that you can protect that company are, I think are quite important.

[00:34:14] Rama Variankaval: That doesn't mean that there is a, you know, one size fits all answer, a classified board is the best answer or the only answer. So I would put that in the menu of things to consider, to make sure that this newly established company has the time to establish itself, to get kind of the, the, the time in this space to operate as a public company and to be able to demonstrate that in, in fact, it can develop.

[00:34:42] Doug Chia: Part of what you talk about in the chapter is incentive structure. Um, and you know, you say designing the appropriate incentives to ensure the entire management team is aligned to the success of the newly formed company is one of the most important roles of the new board. [00:35:00] Getting this right will often be the most important factor in the success of the new company.

[00:35:06] Doug Chia: How is it that compensation is the most important factor? How would you conclude that in, you know, somewhat definitive terms? 

[00:35:16] Rama Variankaval: I would probably not be as definitive as you made it sound. 

[00:35:20] Doug Chia: Yeah. 

[00:35:20] Rama Variankaval: It is clearly an important factor. Maybe one of the most important factors. There is no question about that. We all know incentives drive performance.

[00:35:31] Rama Variankaval: There's no question, right? So the types of decisions we need to make, what the company needs to make in a corporate separation. Now it's typical, again, this typical case where the, the new company, the spinco's management team is going to be the same individuals who are running the business division as part of the parent company.

[00:35:53] Rama Variankaval: So it might be typical that these individuals were compensated in part with [00:36:00] parent company's stock. It'd be quite typical. Now your decision to be made is if you are now creating a new spinco, spinco a new public company, how do you plan to compensate these same executives? Are you now planning to give them, convert their existing parent company stock to Spinco stock?

[00:36:25] Rama Variankaval: Or do you let them retain a little bit of exposure to the parent company? Give them a little bit of both. Going forward, what do you do? Are you doing it in the form of RSUs or stock options, or what's the package? Right? So these things can have a fairly important impact on attracting the right talent, making sure that the incentives are aligned. Right? And setting up for long-term success.

[00:36:52] Rama Variankaval: So. And these are all, again, decisions that normally you are not making. You're making normally incremental decisions. [00:37:00] But this is a, this is almost a recent point when you have to make some fundamental decisions on which way to go. And there are pros and cons for following the template that the parent company might have had or switching to something quite new, depending again on the form of the business.

[00:37:16] Rama Variankaval: If this spinco is a fast growing company, maybe the incentive structure there needs to look quite different than the parent, if the parent was a slower growing, more value driven company. Right? So very, very important decisions. I would say often we end up spending, even though we have the experience of spending a lot of time on these, I feel like we end up spending more time on this question in a transaction than we anticipate at the beginning of the transaction.

[00:37:46] Doug Chia: Does that follow that the new company's board should have, you know, some more, uh, more people with executive comp experience on it. You know, they're gonna have a new compensation [00:38:00] committee. Should they think about having like a chief HR officer on on the new board? Does that become more important? 

[00:38:07] Rama Variankaval: Having compensation experience is absolutely very important.

[00:38:11] Rama Variankaval: I mean, that's again true in any case, but in this case it becomes especially important. And I would say the importance is also a function of how different the business profiles for the parent and the spinco are, if they, the more different they are, the more important this topic is to make sure we get it right.

[00:38:30] Rama Variankaval: If they are not that different, maybe they're different only in the geography of operation or they're marginally different business units, perhaps you don't need to do anything very different. You could follow the parent template, but again, you know, often the reason there is a separation at all is because these are very different units.

[00:38:49] Rama Variankaval: You require a different style of management. You require a different business plan. Typically it follows you to require a different executive compensation plan as well. Hence again, the board having [00:39:00] experience massively helpful. 

[00:39:03] Doug Chia: These spin off transactions, there's nothing new they've been going on for forever.

[00:39:08] Doug Chia: Um, but, you know, today's business environment, um, there's a lot more going on. It's probably a lot more complex than it used to be, say, 20, 30 years ago. And boards are under a lot of different pressures that they weren't. Under, uh, kind of in the, in the old days. And so in terms like, in terms of, of spinoffs, how does that impact or does it impact spinoff decisions or spinoff, you know, mechanics afterwards, uh, in today's world?

[00:39:43] Rama Variankaval: Yeah. I mean, look, the world is definitely different today than 20, 30 years back. In some respects, I might say different than even 20, 30 months back. So there are lots of things that are moving fast. So a couple examples that come to mind. One is [00:40:00] the level of geopolitical uncertainty and trade uncertainty has obviously increased a lot in the last several quarters.

[00:40:08] Rama Variankaval: And so whether you are a standalone company or a newly established company, you have to think about these issues differently. What's your margin profile? Where is your supply chain coming from? Are you able to protect it? Is scale so important that you would rather not create two subscale players who have, you know, less purchasing power or less ability to pass on any added related cost to the customers, etcetera.

[00:40:32] Rama Variankaval: Right? So these are relatively new considerations that we have to incorporate. Uh, that's one. The other, again, relatively new issue. I don't think we spent a whole lot of time, 24, 36 months back was. Where do you incorporate your company? It used to be Delaware was the state of choice. Continues to be,

[00:40:54] Rama Variankaval: obviously, you know the state where most public companies are in fact incorporated, but [00:41:00] there are other viable options that are being explored now in more and more of these transactions. Texa's and option is now Nevada an option, et cetera. Right. So how do you make these decisions? How do you make sure that you're positioning companies for both companies for success so that they're relatively new and

[00:41:17] Rama Variankaval: um, an emerging issue. The other one, and this has been the case in the US capital markets forever, but I think it's more true today than ever before, is the market's value scale a lot. So what you will see in every sector is these scaled players outperform these subscale players. So how do you hold both of these thoughts together?

[00:41:43] Rama Variankaval: That scale actually matters on the market value scale and you should contemplate a corporate separation. In some cases, those two things cannot coexist. In fact, you might say, I'd rather sacrifice a little bit in terms of corporate clarity [00:42:00] and focus on scale. I will be as big as I can be. That might be the right answer for some companies, but for others, the right answer might well be that scale for scale sake is not the right thing.

[00:42:12] Rama Variankaval: Focused scale is what matters. So what I need to do is maybe I need to shrink first to grow. So maybe I actually separate assets that don't belong in my core area of focus, let them chart their own destiny, but then I scale up in my own focus area. And that thought process of how do you evaluate these things?

[00:42:34] Rama Variankaval: What will the market eventually reward? What's the best? What gives you the best chance of success? Again, we used to think about that a lot, always, but I would say that the premium for both corporate clarity on one hand and scale on the other hand, are so high today that you have to very, very consciously and carefully make these decisions.

[00:42:54] Rama Variankaval: So again, you know, yes, spins have been happening for a very long time, but the [00:43:00] issues keep evolving that you have to think. 

[00:43:02] Doug Chia: Yeah. And I guess, you know, going back to this incorporation, um, I think you were referring mostly to state of incorporation in terms of Delaware essentially being the default. And now other jurisdictions like Texas or Nevada, all of a sudden they're generating more attention for various reasons.

[00:43:20] Doug Chia: Uh, there's also. Uh, international, I guess you could spin off to some, you know, tax free jurisdiction or you know, or somewhere that's more favorable to holding intellectual property. Um, that's incorporation. What about Headquartering? Is that coming into play now that especially say a company is heavily dependent on foreign workers, and it might be better

[00:43:53] Doug Chia: uh, in terms of legal regime to be in another, you know, headquartered in another country, does that come into play at [00:44:00] all, or is that really not that relevant? 

[00:44:02] Rama Variankaval: All of the above. I would say there are, I might categorize the considerations into financial and operational. So the financial considerations tend to be, you know, I might want to incorporate in a jurisdiction and list myself in a, in a market.

[00:44:22] Rama Variankaval: Which gives me the deepest access to capital providers. And again, the US will check most of the boxes in most situations, but there might be reasons why that's not the answer. But the financial considerations are obviously something you think through and there are operational considerations. Again, back to the point about we are living in a, in say, more fractured world in terms of flow of goods and flow of services and flow of people.

[00:44:49] Rama Variankaval: You have a decision to make. Who do you want to be close to? Do you want to be headquartered close to at the employee basis where the customers are? What's the right [00:45:00] decision making framework? You have to think through all of that. You know, if you know answer A says you'll have to pay high tariff, but answer B gives you a little bit of relief on tariff,

[00:45:11] Rama Variankaval: obviously, that's a consideration you wanna make If you are in a sector where you need to contract with the local government, right? Wherever you are. Clearly that that is a a consideration, right? Increasingly, governments would like to contract with domestic governments regardless of what country they are, multiple dimensions to think through.

[00:45:33] Rama Variankaval: But absolutely when you're thinking about a separation, you think, again, in a way it's an opportunity to reset and to be here. Think about all of these from a first principle basis. And you know, it'll be a missed opportunity if companies don't do that. And I would say most companies do in fact do that.

[00:45:47] Doug Chia: So I guess going back to what we were saying at the beginning, this is similar to, a private company going IPO, but, but very different in terms of, is way more, way more complex and and [00:46:00] degree of difficulty is, is much higher. 

[00:46:03] Rama Variankaval: It is, of course there is a variation of a corporate separation where you actually take the subsidiary public first and then do a subsequent step of a, what's called a spinoff or a split off. Again, you know, there are mechanically different ways that you can separate the the subsidiary from the parent, and some of them in fact require or entail an IPO. But regardless, the complexity in these transactions tends to be higher than just a straight M&A or a straight IPO.

[00:46:35] Rama Variankaval: These tend to be kind of business strategy meets corporate finance, meets capital markets, meets tax, meets regulation, and you have to make sure you're optimizing as well as possible across all of these dimensions for two different companies all at the same time. So, uh, not easy transactions, but you know, the reason people still think about it, talk about it and pursue them is because it creates value at the [00:47:00] end of the day.

[00:47:00] Rama Variankaval: Yes, again, fiduciary of someone else's capital. As a public company, it's incumbent upon you to kind of think through ways to maximize value. Again, not always, but in many instances, corporate separation might be the answer. So I, I would say. It's part of the toolkit that every sophisticated management team evaluates on a regular basis.

[00:47:22] Rama Variankaval: Doesn't mean it's always the right answer. 

[00:47:24] Doug Chia: Well, it must be fascinating to be involved with Rama. Thanks again for, for joining. This is a great discussion. That concludes this episode of The Public Company Series podcast, powered by onboard, and I'd like to thank Rama Variankaval of JP Morgan for sharing his insights.

[00:47:43] Doug Chia: And I encourage you to read, uh, Rama and his colleagues' chapter of the book entitled, Governance for Strategic M&A: Navigating Spins and More, which you can find in the book Board Structure and Composition part of the Public Company Series [00:48:00] published by the New York Stock Exchange and JP Morgan. You can read and download the entire book at www.nyse.com/pcs. To learn more about OnBoard, visit www.onboardmeetings.com, and for additional resources and episodes, visit www.publicompanyseries.com. And don't forget to subscribe to receive all the new episodes of the Public Company Series podcast and rate us and leave us a review. I'm Doug Chia, and we'll see you next time.