Spinoffs Revisited

By Eric Fox | March 10, 2009 AAA

Publicly traded companies regularly pledge to create shareholder value. One way a company may go about accomplishing this is to spin off one or more business segments to its shareholders. Although this is common in corporate America, the success rate of spinoffs is mixed.

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Two Reasons
Companies typically cite two arguments for a corporate spinoff. First, a spinoff will allow management to focus on the company's core business. Second, with the market able to value the pieces of the company separately, a boost in stock price should ensue. The theory holds that the value of the sum of the pieces will be worth more than the value of the original entity. This belief is usually predicated on the company having a smaller, but faster growing division that is buried within a stodgy old-line mature growth company. (Learn more about what happens when companies unite (or separate) in The Wacky World of M&As.)

Abraxis BioScience (Nasdaq:ABII) was involved in a separation in 2007, when the previous corporate entity it was a part of split in two. Abraxis kept the oncology and research businesses, while the pharmaceutical products business became APP Pharmaceuticals.

Shareholders in the old entity kept their shares and received one new share of Abraxis BioScience for every four they owned of the old company. This deal appeared to work out for investors, as APP Pharmaceuticals was bought out by Fresenius, a large German healthcare company involved in dialysis services, for $4.6 billion in the fall of 2008. Abraxis BioScience is down only 11% over the last year as of the close on March 11, compared to the S&P 500's drop of 44%.

Dish Network (Nasdaq:DISH) undertook a similar restructuring in early 2008, when it spin off of its set top box and other technology businesses into a separate, publicly traded company called EchoStar (Nasdaq:SATS). Dish Network kept the pay-TV operations, while shareholders of Dish Network received 0.2 shares of stock in EchoStar. (To learn more about the ways shareholders get paid, read Which is better a cash dividend or a stock dividend?)

Management justified the spin off using the "increased value" and "core business" arguments. "We believe separation of our consumer-based and wholesale businesses could unlock additional value," Chairman and CEO Charlie Ergen said. "Each company would be able to separately pursue the strategies that best suit its respective long-term interests."

However, neither company has added much shareholder value thus far. Dish Network is down 68% from the spinoff and EchoStar is down 60%.

Perhaps the greatest spinoff in history occurred when AT&T (NYSE:T) was broken up into seven regional bell operating companies (RBOCs) in the 1980s. Investors who held AT&T prior to the breakup would today own shares of AT&T, Qwest Communications (NYSE:Q) and Verizon (NYSE:VZ)

Bottom Line
Corporations pursue spinoffs in a quest to increase shareholder value. But often times, the opposite occurs. Managers should probably take a long hard look at this strategy before engaging in what might be termed "herd-like behavior", similar to the actions of many investors.

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