The Cost of Pharma Divorce

Corporate spin-offs are on the rise across the pharmaceutical sector, but at what cost to shareholders? Brian McGilligan argues that in haste to obtain decree absolute, demerging businesses could be threatening their long-term viability.

Demergers are in fashion again. After years of rampant and unpredictable M&A activity, 2012 is seeing a significant rise in corporate divestitures. According to a recent Financial Times report, global divestments will increase by over 90 per cent to become a £250 billion market. Pressures specific to pharma, not least competition from generic drug manufacturers, will ensure the sector plays its part as large companies continue to re-appraise and spin off lower margin parts of the business to maximize shareholder value.

Indeed, divestments can be excellent news for shareholders - however, the process should not be undertaken lightly. Corporate divorce is rarely pretty. More often in these deals the dominant party is looking to sell off an underperforming division, strip out the best bits and set it adrift to fend for itself in the real world. Employees, feeling somewhat abandoned inevitably want to fight for the spin off business, their shareholding and their futures.

Adding to the challenge is the unpredictability of demergers; each case is very different and one size does not fit all. For the majority of CEOs (and their boards) this tends to be new territory, not an everyday activity.

So what can businesses do to ensure that plans to demerge are not left to run wild and end up costing significant lost revenue and stock value?

Executive teams first need to understand the likely issues. Demergers will throw up a number of headaches; some familiar, others not so. The team should appreciate that openness and amicability will be in short supply due largely to the wide range of vested interests inherent in a corporate split. Added to that are compliance and regulatory issues which vary both by industry and country, even within the EU. Based on fact, fiction or a combination of the two, suppliers and customers will be wary of any potential impact from the transition of management, staff, structure and assets. Fluctuations in cash-flow and costs often lead to pressure on the balance sheet, which will need to be managed tightly during the programme.

One of the most misunderstood elements of demerging is the fact that there has to be an interim state, lasting anything from two months to more than two years where the divested company remains tethered to the mother-ship, but starts to operate as an independent business.

Of course the speed at which progress is made through this stage can have huge effects on morale and motivation of staff. If it takes too long, key personnel may become frustrated and leave. Losing staff at this juncture is a very real possibility but it can be managed. Having a well-designed interim state and a clear plan to transition quickly will ensure the greatest chances of success here. Equally, while negotiating through an interim state, management should avoid the desire to implement change or fix non-essential issues. Aside from demerging, anything other than keeping-the-show-on-the-road should be off the agenda.

The need for impartiality is paramount and why chances of success will be increased greatly by appointing a professional, experienced and independent team for the programme. Emotion is often underestimated; it’s a serious factor which will increase risk, lead to poor planning and decision making - which ultimately will cost more and affect shareholder value greater.

Internal appointments rarely result in the best team being in place. Top executives and managers are needed to manage the business, and therefore by default it will be a less skilled, less motivated team, having to make decisions about which they would have limited experience. When faced with complex stages of demerger activity, there is no substitute for experience.

Finally, communicate like mad to each and every stakeholder group; employees, the market, suppliers, customers and shareholders alike. Keep the rationale for the demerger forefront of mind and keep everyone informed about where you are on the journey and what the destination looks like.

A good deal for the business, well brokered and strategically sound will invariably net the Executive team an appropriate level of appreciation from shareholders for a job well done. The reality is, however, that at this stage the job is only half done. Those who lead the company in to the deal need to ensure they’ve equipped it with the right team and tools to deliver. Only then can they be sure of fulfilling those promises that won the plaudits.

Brian McGilligan is AVP, Life Sciences Program Management Consulting Lead, Cognizant. He can be contacted on +44 (0) 20 7297 7800, or at Brian.McGilligan@Cognizant.com

www.cognizant.com/life-sciences