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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).


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