If You Can’t Grow, How About Shrink?

By itself, this week’s announcement that a big entertainment company intends to split itself up may not be big news. But it’s a signal of a curious trend around self-imposed breakups (including at other entertainment firms). Indeed, so far, 13 mid- and large-sized publicly-traded US firms have announced intentions to spin off parts of their businesses. Six others completed spin-offs. Many other firms have announced intentions to sell off multi-billion-dollar operations.

In nearly every case, the firms have said they needed to restructure to be more competitive or to adapt to a changing business landscape. But experts say there’s typically another, less public benefit: the business it shed, or the overall company, wasn’t growing. Indeed, experts say that faced with the prospect of either slow revenue growth or even declining revenues, top executives are deciding that the easiest way to make overall profitability better is to get smaller. “They call it the pruning effect,” says JP Sniffen, a Korn Ferry senior client partner who has observed the trend at multiple manufacturing clients this year.

Getting smaller, of course, is not exactly in the DNA of many executives; far more iconic business leaders are known for growing businesses, not shrinking them. Sure, leaders routinely close factories or reduce employee headcount as a way to increase productivity, but selling off massive, and often profitable, parts of a business empire is an uncommon step for firms not in financial distress.

But these days, there’s frustration among leaders across industries that revenue growth is increasingly hard to find. Globally, corporate revenues grew by only 1% in 2024, well below the rate of inflation, according to research firm Fitch Ratings. This year’s projected growth rate of 1.9%, while better, still doesn’t top the rate of inflation in most parts of the world. The World Bank goes even further with its latest forecast, it believes that by 2027, global gross domestic product growth is expected to average 2.5%, the slowest pace of any decade since the 1960s. The recent stats follow a steady slowdown of growth over the past three years, as companies find it increasingly difficult to raise revenues.

Executives can’t rely on the traditional tailwinds that would help their businesses grow. The world’s economies aren’t growing that fast. And buying another firm is often too expensive because interest rates make financing pricey, or a potential acquisition target’s stock price is already high. That hasn’t stopped Wall Street activists from pressuring corporate boards and executives to do something to keep growing profits. So, instead of throwing more resources into making a slow-growth business grow faster, some executives are looking to just get rid of them, Sniffen says. “They’ll double down on the most efficient operations and spin off or close others,” he says.

To be sure, getting smaller, especially after a spin-off or business sale, can provide a jolt to an organization. In 2024, the 20 major spin-offs of US companies raised nearly $13 billion from IPOs, double the number and value from 2023. Experts believe the figures will be even higher this year. A cash infusion from the transaction can help a legacy firm focus on its best growth prospects, reward its shareholders, or both. Plus, there’s ample evidence that, at least when it comes to spin-offs, the smaller firm can actually outperform its original organization.

But experts caution that executives might not want to give up on growth just yet. Indeed, there are often internal obstacles that can keep a company from growing, which executives can address. Much of it has to do with culture, says Grant Duncan, Korn Ferry’s Consumer practice lead in the UK and Ireland. Some of it involves attracting talent who are curious and have a growth mindset. Other times it involves giving employees the support to take risks. “Leaders should encourage—and reward—employees for coming up with creative ways of solving problems,” he says.

What’s more, the business being shed can turn around and come back to bite the leaders who sold it. Indeed, there is a long history of shedded firms surprising skeptics by developing new operations that energize employees. “The spun/sold company can give employees a lot more autonomy to make decisions that will improve the business,” says David Vied, global sector leader of Korn Ferry's Medical Devices and Diagnostics practice.

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