Every business goes through different phases in its life cycle: launch, growth, maturity, and eventually, decline. In order to extend its growth phase, an enterprise needs to constantly expand and explore new areas, otherwise it will eventually be driven out of the market by competition. The saying “to stand still is to fall behind” not only applies to personal development, but is also the motto of many successful enterprises.
Companies maintain their business expansion through a series of mergers and acquisitions (M&As), disposals and spin-offs. Enterprises may expand vertically to develop their business scope in the value chain, or horizontally into new markets or business sectors through M&As, which may come in the form of a share investment, an asset acquisition, a business acquisition, or a reverse takeover. When the newly acquired business further develops in terms of scale and market share and then matures, its management may consider listing it separately on a stock exchange in the form of an initial public offering (IPO). This will help the company find independent external financing, delineate business areas and release shareholders’ value, and therefore promote sustainable development. It is also important for enterprises to divest any old business and focus its resources on new areas with better potential to maintain momentum.
This is indeed the success formula for many enterprises to grow, expand their reach and create new value for shareholders. A well-planned spin-off allows a company to raise capital for an expanding business and provide an exit of any non-core business, enabling the parent company to focus its resources on other opportunities and seek further growth in future. The company being spun-off will also have direct access to the capital market, diversify its financing sources and reduce reliance on the parent company. It will also increase the accountability of the independent management team and incentivize them by introducing a share incentive scheme.
Hong Kong is renowned for being an active and sophisticated hub for M&A and IPO activities. M&A activity involving Hong Kong companies saw the strongest first half in four years, as deal-making picked up amid the economic recovery in Hong Kong and Mainland China. Seven hundred and thirteen deals worth a combined US$55.4 billion were announced in the first half of 2021. In 2020, there were 18 successful spin-offs, including nine Hong Kong-listed companies spinning-off new businesses in Hong Kong and nine others spinning-off new businesses in other markets such as in Mainland China, the United States, Thailand, India and Norway.
But bear in mind that it takes years to formulate and carry out a successful M&A or spin-off. It often involves carefully selecting investment targets, consolidating and segregating businesses, restructuring the group and organization structure, and rationalizing business transactions in order to fulfil relevant M&A and spin-off requirements. There are also various regulatory constraints under the Hong Kong Stock Exchange’s Listing Rules and the Securities and Futures Commission’s Takeovers Code for listed companies to take note of. There are different classifications of acquisitions under the Listing Rules, and various ways of executing an acquisition and relevant requirements to be considered in planning and structuring an M&A. One must therefore take a holistic approach in planning a future M&A or IPO.
Financial centres exist to nurture new business and to help them prosper. They raise funds and financial resources for business expansion, provide platforms for business cooperation and acquisition, and offer professionals the help needed to formulate and execute corporate actions. Thanks to Hong Kong’s well established financial infrastructure and regulatory framework, a clear mission, careful planning and assistance from suitable advisors, enterprises can go up the upward spiral of sustainable growth through M&As and spin-offs.
About the e-Series course
To help accountants, entrepreneurs and professionals understand the dynamics of M&As and spin-offs, I have conducted an e-Series course “Understanding Spin-off for Accountants and Market Practitioners” specially designed for business leaders, financial controllers of listed companies and market practitioners involved in various M&A or spin-off activities. The course explains the basic frameworks governing M&As and spin-offs of a listed company, as well as the risks, requirements and merits of typical M&A and spin-off structures. I also share some practical tips on how to determine a suitable business for spin-off and segregate it in the early planning stage, how to plan and execute the spin-off, and how to achieve its business objectives within regulatory frameworks. Finally, I share real-life examples of some unique or landmark cases, which illustrate key areas that participants should consider when planning their potential spin-off transactions.
Jeremy Lau FCPA is a Managing Director of Grande Capital Limited and a sponsor principal approved by Securities and Futures Commission. He has 15 years of experience in corporate finance, audit and advisory. Lau has served as a responsible officer in a couple of sponsor firms, and actively participated in numerous mergers and acquisitions, initial public offerings and spin-off projects in various industries such as consumables, technology products, media, securities, property management and construction.