Join        Login             Stock Quote

When the Time is Right, Spin-Off

 April 07, 2008 06:53 PM

How to respond to a $12.1 billion dollar first quarter loss and stumbling stock price? For UBS AG (UBS), the answer could be "spin-off". The bank championed the integration of private banking and investment banking under one roof- until subprime losses rocked both units. Now, activist shareholders are calling for the break-up of the combination.

Generally speaking, a spin-off can create immediate returns for investors by unlocking intrinsic value shrouded by a poor performing division. In the aftermath of the M&A frenzy and easy credit of the last four years, there stands to be a lot of this value to be found over the next few years.

Barry Diller's IAC/InterActiveCorp. (IACI) ambitiously assembled a "GE style conglomerate for the digital age" of diverse (and fairly unrelated) new media businesses. Now Diller plans to disassemble it into five separate companies – multi spin-off.

[Related -The Best Of Three Tech Shorts]

Many great spin-offs are the result of the explosive growth of a division of a larger firm. Many of these instances tend to be "value diminished" by being weighed down by an array of mature sibling divisions in a conglomerate. It becomes more difficult to reach "fair valuation" of what very well may be twice the P/E ratio.

In another current example, Phillip Morris International (PM), a spin-off of the Altria Group (MO), began trading on the NYSE last week. Phillip Morris accounted for a substantial 2/3 of Altria's revenue. By completing the spinoff, Altria is betting that the world's largest publically traded cigarette company makes for a more attractive investment proposition as an independent entity. There are litigation matters that may follow the firm forever. Or perhaps they won't.

[Related -IAC/InterActiveCorp (IACI): How Attractive Is Match Business?]

Spin-offs come in all shapes and sizes and need to be evaluated properly. Why was the firm spun off? What kind of shape will the firm be in during month one, six, and beyond?

More investors than ever are looking for specific solutions for their portfolio. An easily understood company in a specific industry (without excess "fat" or suffering from a conglomerate discount) can fairly swiftly unlock shareholder value. Simpler to explain can also mean simpler to acquire. Management alignment directly with shareholders is another part of this story. Those lofty C level executives do not like working hard for other divisions which will blend into their P&L. Aligned motives of shareholders and management have proven to work. It is better for many senior managers to have their work and success reflected directly in their share price and P/E multiple.

Give a high growth unit the chance to reap the benefits of a high growth stock, shed a non-core business, or give investors the chance to buy into a specific industry without taking on other divisions. We believe Spin-Offs stand to become increasingly prevalent in the near future.

Disclosure: Mr. Corn is CEO of Clear Indexes which publishes the Clear Spin-Off Index (CLRSO) which is licensed for the ETF (CSD).



Comments Closed

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.