Abbott CFO: How and Why to Spin Off

May 30, 2014, 2:50 AM ET

Abbott CFO: How and Why to Spin Off

NOELLE KNOX

Editor, CFO Journal

Abbott LaboratoriesABT +1.04% split into two companies at the beginning of 2013. Abbott retained the name and medical products business. The pharmaceuticals business is called AbbVieABBV +0.56% and its stock trades separately. Abbott’s Chief Financial Officer Tom Freyman spoke to CFO Journal Editor Noelle Knox about the logistics of the deal.

Q: Walk me through the decision to spin off your pharma business.

It was a fundamental change in the type of business we were in…It was effectively a reverse integration. Our chief executive officer, Miles White, was involved with strategic planning and, together with the board, he strategized with them about the evolution of our businesses. [The businesses] had different profiles. Our CEO talked with the board about the changing environment, changing markets. He also interacted with our investors, who also struggled with [Abbott having] two different businesses under one roof.

It went quite well. It was one of the most successful [spinoffs] in the market. Separate, we were valued more than together. The combined stock has increased 78% since the separation was announced in October 2011.

Q: Why spin off the pharma business instead of sell it?

We talked a lot about the businesses evolving into different identities, and investors had different appetites. The spin off was a straight-forward way of changing. We let investors take the decision [of whether to hold or sell the new stock in AbbVie]. That was the rationale for the deal. If you are trying to sell it as an asset, then A) you have to find a willing buyer; B) the price has to be agreed on; and C) you have to execute the transaction and pay the tax due.

We believed that proprietary pharmaceuticals was a differentiated investment area with investors who appreciate the opportunity of high risk/high rewards and high dividends…It takes a special group of investors to evaluate that.

When you have a portfolio of businesses, in order to have synergies you need other, similar unifying characteristics for the portfolio to make sense.

Q: What role does the finance department play in that?

The financial organization has to be aware of the evolution of the business and inform top management of how business is progressing over time and re-evaluate whether [the company] belongs in that business.

Q: The split was also a reversal of your previous M&A strategy.

We were more acquisitive as a company 12 to 13 years ago. [Miles White] made significant acquisitions. We are one of the best-in-class companies at integrating businesses. We have a dedicated integration team. It is a sophisticated process. With the acquisition of the pharmaceutical division of BASFBAS.XE -0.31%, which had a product in phase III development, for example, we coordinated across the company and in all functions: commercial, manufacturing, quality, HR and all of the finance functions.

Q: How integrated are the different finance departments?

On an operating level, we are separate. Each business has its own finance team and helps it manage operations.

Q: How did you split the finance department with AbbVie?

There was a lot of work separating the organization. We had to have people for treasury, investor relations, tax, internal audit, those types of functions. There were brand new departments. We had to identify new leaders, though the vast majority were internal candidates.

Q: How large is your finance department?

In the thousands. We had to hire very few additional people to truly separate the finance departments. And in terms of work load, a big chunk goes away [with the spin off]… Both companies needed great people. One of the big objectives from the beginning was finding the balance of talent. It wasn’t quite like the NFL draft, but it was a major effort. One of the things that helped us on this regard was our succession planning, [identifying] who were the future candidates for certain roles.

Q: Does your finance department have a career path for new hires?

Generally, people have a very long career here. We recruit at the entry level and then there is a training program…We hire people with strong accounting and audit experience and bring them through the internal audit function for two years and then move them into operating roles. We have a strong retention rate. More than half of the internal auditors we have hired over the past 20 years remain with either Abbott or AbbVie today.