Spin to Win
Spinning off an Internet arm is one strategy old economy
companies can adopt to react quicker to the pace, and threat, of the e-business
environment. Let’s have a look at the advantages and pitfalls of
creating a dot corp.
Traditional companies have often been accused of developing
an e-business strategy too little, too late, staying on the sidelines
while pure internet start-ups steal business from under their noses. According
to a report from Mercer Management Consulting, corporate companies that
have made use of the web have often failed to coordinate their efforts,
with each division setting up its own presence on-line.
But one way that corporate businesses are looking to
take advantage of the web and respond to the threat of internet start-ups
is by nurturing an internet arm within the existing business, and creating
a spin-off from the parent company. By doing so, companies can leverage
existing assets and create a division that can be taken public at a later
stage.
Floating a spin-off is not a novel concept for corporate
companies, but with internet spin-offs, companies are hiving off divisions
that could produce the biggest potential in terms of growth and return.
Only recently, the Press Association sold its internet news service, Ananova,
to Orange for 95 million Pounds . According to a projection by e-business
consultancy Cell Strategy, which invests in European start-ups, the latest
e-business wave will be a host of spin-off IPOs in the next 18 months.
An Internet spin-off allows companies to be more dynamic
by bringing in new thinking.
In the UK, the financial services sector has been one
of the industries adopting the internet arm concept in recent months,
with the launch of Smile from the Cooperative Bank, Cahoot from Abbey
National and Intelligent Finance from the Halifax. Examples that have
been taken through to the flotation stage include on-line bank Egg from
parent company Prudential, travel company Ebookers, spun off from London-based
travel agent Flightbookers, and internet service provider Freeserve, backed
by high street retailer Dixons.
For companies, floating a spin-off web division may be
partly motivated by the high values placed on internet stocks, but since
the downturn in the market, this could become less of an issue. With the
short lived success of once lauded internet companies such as Boo.com,
the focus is in moving back towards how established, old economy companies
are leveraging their assets in the online world.
"Since the demise of Boo.com, we have seen a change
in the dot com climate," according to an analysis by EMEA, of Net
Generation Industries at IBM.
"There isn’t a reduction in investment, as
there is plenty of evidence that there are many funds available, but there
is a degree of caution being applied. Corporate companies are back in
the game big time, either by spinning off divisions or forming partnerships
to cover a range of business models."
Carving an online business out of a corporate company
attracts customers drawn to a brand they can trust and visualize in the
real world, and also ensures an easier route to funding, given the amount
of money venture capitalists are prepared to invest in internet operations.
There are a number of different ways to look at the advantages of spinning-off
an internet company.
Free Rein
Spinning off an e-business unit is a way to set free
the management team of the new entity while enabling it to help itself
to the assets and skills the parent company can support it with. It is
also a way to maximize the value of the new entity, as outside analysts
and investors can more easily access its stand-alone value.
According to few e-commerce analysts, a start-up vehicle
can incur quite heavy losses that all too often the parent does not want
to take up, in case this has a negative effect on company stock. Or, the
parent may not be willing or able to fund that business to maturity, as
internal financing can prove to be an expensive proposition.
They say that often companies looking for the best way
to create value for internet arms will consider carving separate business.
This is because shareholders who buy into the parent company may be willing
to invest in its internet operation, but up to a certain point only, as
they are valuing the company based on its traditional business. Splitting
the internet division from its parent can also enable traditional companies
to keep hold of high-achieving staff who would otherwise be tempted to
migrate to a dot com player.
New Thinking
By and large, companies have been slow to respond to
the web, with management teams who are uncertain that the internet will
be a viable channel for consumers. An internet spin-off allows companies
to be more dynamic, by bringing in new thinking and a separate management.
Swedish internet company Bluetail, founded in January
1999, develops solutions to improve website speed and reliability. It
was spun off from communications supplier Ericsson. Most of the staff
of 20 are research engineers who were originally employed at the research
laboratories at Ericsson.
"Ericsson was focusing on its core business of mobile
internet and infrastructure, which didn’t leave a lot of space for
people in the research laboratories to exploit innovation. Often a mature
company does not have the time or the patience to manage a team distant
from its core business, which can be frustrating, hence the decision to
spin off a division and form Bluetail," says the CEO of Bluetail.
Barclays Bank recently launched a separate unit offering
a range of net-based services, under the name of Barclays B2B.com, which
is aiming to provide a direct channel for the sale and delivery of business
and financial services. It has been set up with a dot com culture to allow
it to develop at internet speed.
One of the biggest challenges corporations face when
spinning off a division is having a clear employee proposal. Companies
need to be clear why they want staff to join, what they expect of staff
and what benefits there are. Dot corporations can offer the best of both
the old and new economy worlds, providing a dynamic environment with reliability
and stability.
Traditional companies are biting back but they must
move quickly or risk missing opportunities.
Although Barclays B2B.com is a separate unit, it has
chosen to retain its parent’s name because, the name has strength
in the marketplace, and will provide customers with trust.
People are vital and if you don’t manage them in
an appropriate way, it places them at a huge risk.
Building Business
Netdecisions, which builds internet businesses and helps
blue-chip businesses adapt to the internet, believes no ‘one size
fits all’ when corporate companies are looking to take advantage
of the internet. Netdecisions recently helped to launch internet holiday
company Firstresort.com, a spin off from holiday operator Thomson.
It is not a case of black and white, spin-off versus
joint venture or partnerships. It can depend on many factors such as branding,
management and fulfillment. It may make sense to keep some parts in-house
and spin off other parts.
The challenge for corporate companies is, creating an
environment where you move quickly enough with the best people –
people are the most important asset if companies are going to grow their
businesses quickly. Many people underestimate what is required. Traditional
companies are biting back and have many advantages but they should not
be complacent. They still do not move quickly enough and risk missing
opportunities.
Forming an internet business out of a joint venture is
another approach old economy companies are using, as in the case of Merrill
Lynch HSBC, an on-line banking and investment service company, and Work
24, a small business internet portal founded by Scottish Power and Royal
Bank of Scotland.
But does a spin-off model work for all companies? IBM
in its analysis says it might not give all management teams strength,
as some spin-offs may operate as separate businesses, but the danger is,
they can still be tied to the corporate umbrella.
"Some days a spin-off can achieve great results,
on other days it can be like an organ rejection," says IBM. "
Spin-offs must learn how to leverage the best of both old and new worlds,
but it depends on the extent to which they are let loose."
Company spin-offs must learn to leverage the best of
both the old and the new worlds.
Above all, corporations looking to move online will need
to do so quickly and with a degree of experimentation. Going by the magnitude
of resources directed at the net, the ability to grow rapidly and the
value of first-mover advantage mean companies need to move quickly to
lock up, not only valuable customers and brand awareness, but also key
talent, strategic alliances, content and technology. If there is an opportunity
to enhance the business through the use of the internet, incumbents must
cannibalize or be devoured by competitors.
According to Cell Strategy by isolating the e-business
unit, it becomes more likely that those left in the parent company will
not adopt the practices of the new economy. This is a real danger. The
trick is to imbue the organization with the will and means to change all
parts of its own business while enabling some of the more aggressive new
business ideas to develop in the protective cocoon of autonomy that a
spin-off provides. That way, shareholders are also best served. But very
few companies have found a way to combine these two thrusts.
(Compiled by Mahendra Vesawkar who looks after the business
development at ITNTI, Information Technology & Telecom company with
references from International writings).
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