To spin off or combine businesses?

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Just got this question on my LinkedIn group – Should a mid-size multi-business firm spin-off different businesses into independent companies to spur growth or pool-in collective resources for a common growth program?

This goes back to the issue of “related diversification” – not essentially much different for mid-size firms than for large ones. Back in the 1960s, unrelated diversification was all the rage, spurred by the BCG matrix ideas, but it then became clear that ‘corporate’ added no value to such random business portfolios, and raiders broke them up, selling the bits to groups where they added value.

Same applies today – if any one of your businesses really has no connection with the others, then it is probably worth more to someone else with whom it *does* fit than it is to you. How to tell? Estimate its likely future cash flows in your hands, then ask if someone else could make those cash flows grow faster – for example, do they have sales channels that could build sales faster than you can, or do they have similar manufacturing plant that could be rationalised with yours? If yes – call them up and see what it might be worth!

If one of your businesses *is* related to others you own, though, check which resources and capabilities are common, and seek ways to strengthen them. It’s not exactly a “rule”, but shareable resources and capabilities are commonly at the back end of the business – R&D, IT, sourcing, production – with the front-end (marketing, sales, service) being harder to combine across different businesses. The challenge is to make this resource-sharing effective, without becoming cumbersome and holding back any of the business units involved in the sharing.

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