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.

IN PICTURES: Eight Ways To Survive A Market Downturn

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.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!