32 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
This was a surprising method of turning to the public markets to nance
certain promising operations while retaining a majority interest in the pub-
lic entity post-IPO (Initial Public Offering). Simultaneously lowering its cost
of capital and establishing a higher valuation for its majority stake made the
sum of the parts much greater than the whole.
For example, in August 1983, Thermedics (the rst of Thermo’s IPO
spin-outs) raised a total of $6 million. At the time, Thermedics had sev-
eral research contracts from the National Heart, Lung, and Blood Institute
(NHLBI) to develop a surgically implantable left ventricular assist device
(articial heart) for patients in irreversible congestive heart failure. However,
NHLBI funding was decreasing and the future looked bleak. Indeed,
Thermedics’s offering prospectus clearly warned of “substantial operating
losses” to come. Nonetheless, Thermo retained 4.2 million shares (86.6% of
the total share issuance) of Thermedics, whose post-IPO market value was
an astounding $40 million.
Thermedics’s intrapreneurs who developed the technology were given
senior managing positions in the public entity and substantial share options,
thus bonding them to the Thermo “family” and discouraging them from
leaving to form competing rms. Thermo’s culture encouraged intrapreneur-
ship by helping intrapreneurs take their divisions public. If an employee had
innovative products and intrapreneurial drive to create his or her own busi-
ness, Thermo would be there to help.
Table2.8 summarizes the spin-outs engineered by Thermo between the
years 1983 and 1995.
11
For every new spin-out technology, Thermo created an intrapreneur’s
paradise by promoting the innovators with administrative, nancial, legal,
marketing, and organizational backing. The intrapreneurs and technical tal-
ent of the public companies gained autonomy, stock ownership, and control
without adult supervision. Investors bought into a clear and focused venture
whose strategic and nancial potential was not diluted by the labyrinthine
hierarchy of the parent organization. Thermo was white hot.
At the time of the 12 spin-outs, Thermo was still being run by the origi-
nal founders, the Hatsopoulos brothers, who were not afraid of being
outshined by their intrapreneurs or losing their jobs to a younger crowd.
Perhaps professional managers would be worried about losing control or
their power base.
From 1993 to 1996, Thermo stock price tripled. However, by 1998, equity
analysts were confused by so many “Thermo children and grandchildren.”
Each child had its own board, products, and target market. Businesses
Intrapreneurship: Corporate Entrepreneurship ◾ 33
overlapped and customers became confused—Thermo had gone too far
with this model. Many of the spin-outs contained core businesses that
should have remained within the parent, while others were non-core busi-
nesses that should have been completely spun-off by traditional methods. In
1998, Thermo stock lost $40 per share in a single year, hitting bottom at $10
per share. By the end of 2001, all the spin-outs were stopped. Their early
success had turned into late excess.
Notwithstanding, the Thermo spin-out model still remains a viable alter-
native for many large companies wishing to reward divisional intrapreneurs
who aspire to become independent businesspeople.
2.9.2 The Spin-Off Reorganization
“Every battle is won before it is fought.”
ATT/Lucent, GM/Delphi, DuPont/Conoco, and RJReynolds/Targacept did not
follow the Thermo model. Instead, they followed the spin-off model. The
parents granted outright ownership of all intellectual property and divested
themselves from controlling interests,
12
as shown in Figure2.5.
Table2.8 Spin-Out Culture Thermo “Children” and “Grandchildren”
Spin-Out Company Name IPO Date Month/Year IPO Price per Share ($)
Thermedics 8/83 9.50
Thermo Instrument 8/86 8.00
Thermo Process 8/86 6.00
Thermo Power 6/87 8.50
Thermo CardioSystems 1/89 8.50
Thermo Voltek 3/90 1.12
Thermo Trex 7/91 12.00
Thermo Fibertek 11/92 8.00
Thermo Remediation 12/93 12.50
ThermoLase 7/94 6.00
Thermo Ecotek 2/95 12.75
ThermoSpectra 8/95 14.00
34 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Spin-offs are the low-hanging fruit of the investment world. In a spin-off,
the parent corporation distributes on a pro-rata basis all the shares it owns
in the unit (subsidiary or division) to its own shareholders, thus creating a
new public company. This divestiture is typically undertaken for the reasons
shown in Table2.9.
Recipients of the new company’s equity usually greet their arrival with
great expectations because the newly independent management—freed of
corporate yokes—often thrives and generally outperforms the Standard &
Poor’s stock indexes in the early years. However, on many occasions, stock-
holders dump their new shares, unwilling to hold a position in a smaller
company. Institutions may be forced to sell because their charters forbid
owning new issues or small businesses.
13
2.9.3 The Equity Carve-Out
“Everyone is entitled to be wrong. At least once.”
An equity carve-out (ECO), also known as Financial Engineering, is a
variation of a spin-off. Many companies have chosen to spin off a single
subsidiary by means of an equity carve-out; others go further and use the
Spin-o schematic
Company “A”
Pre spin-out
Subsidiary
Company “A”
After spin-out
New company “B”
(1) Shareholders receive shares of new company “B”.
(2) Shareholders still own shares of company “A”, which now only represent
ownership of “A” without “B”.
Figure 2.5 Spin-off schematic—The spin-off divestiture at a glance.
Intrapreneurship: Corporate Entrepreneurship ◾ 35
carve-out as a basic organizing principle, repeatedly selling stakes in busi-
ness units. The private equity industry grew up around corporate carve-outs.
Buyout rms believe the strategy, involving the purchase of unloved divi-
sions of big corporations, provides a clear way to add value through strategic
and operational improvements.
14
An ECO, split-off IPO, or a partial spin-off is a form of corporate reor-
ganization in which a company creates a new subsidiary and IPOs it later
while retaining control. Usually up to 20% of subsidiary shares are offered
to the public. The transaction creates two separate legal entities— parent
company and daughter company— each with its own boards, manage-
ment team, nancial, and CEO. Equity carve-outs increase the daughter
company’s access to capital markets, enabling the new subsidiary to exploit
stronger growth opportunities while avoiding the negative signaling asso-
ciated with a seasoned offering (SEO) of the parent equity.
15
Table 2.10
summarizes the most common types of restructuring associated with a
carve-out.
16
The overarching purpose of a corporate center is to do for the subsidiar-
ies what they cannot do effectively for themselves. Many structures serve
this purpose: operating companies, multi-business companies, holding
companies, conglomerates, and even investment rms such as Berkshire
Table2.9 Reasons for Spin-Outs
“Business has only two basic functions: marketing and innovation. Marketing and
innovation produce results. All the rest are costs.” Peter F. Drucker
• Unit spun-off no longer had “strategic t” • Reduction of corporate
asymmetries
• Parent’s wish to return to its core business
model
• Greater customer focus
• Unit creates “pure play” in the market • Promote innovation
• Unit unprotable • Retain and motivate brightest
talent
• New management compensation directly
tied to unit’s performance
• Attract new blood and ideas
• Improved management focus • Reduce decision-making time
• Faster introduction of new
products
36 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Hathaway. All are different ways for a centralized parent organization to
deliver value to its individual business units. The newcomer to the list is the
equity carve-out. Like its predecessors, the carve-out enables a subsidiary
to draw on the wisdom, experience, and practical assistance of the execu-
tive center while offering something new—a degree of independence that
appears to foster innovation and growth.
17
Equity carve-outs, that is, IPOs of subsidiaries, are not unusual. AT&T is
the poster child for equity carve-outs, having tried almost every restructur-
ing method known in this galaxy. AT&T underwent a government-mandated
carve-out of each “Baby Bell,” whereby each shareholder received 1 share of
the new company for each 10 A&T shares.
Pharmacia carved out 14% of Monsanto in 2000. In late 1998, DuPont
raised $4.4 billion by undertaking an equity carve-out equal to 30% of its
oil subsidiary Conoco. Later the same year, CBS raised $3 billion in a carve-
out of 16% of subsidiary Innity Broadcasting. In August 1998, Cincinnati
Bell sold 15 million shares in an IPO of subsidiary Convergys. Later that
year, Cincinnati Bell distributed the remaining 137 million Convergys shares
to its shareholders.
Equity carve-outs offer several advantages to a company and its share-
holders. In general, management of the parent rm believes the market
value of the separated companies will be greater than the market value of
the combined rm prior to the carve-out. Perhaps the investment community
has been overlooking the real value of the subsidiary that produces good
nancial results but is overshadowed by the other parts of the rm. Another
plus is that a separately traded stock allows the former subsidiary to use its
own stock as a currency for acquisitions and management incentives. The
new publicly traded company will have access to the equity markets that
can provide capital for expansion.
18
Table2.10 Carve-Out Methods
• First stage of a broader divestiture, preceding:
• Sale of subsidiary to a third party
• Spinoff of remaining ownership to shareholders
• Total or partial company splits
• Tracking stock by creation of new stock class based on divisional valuation
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