Several major companies are planning to spin off business segments over the next six months in an effort to increase shareholder value. Investors and management teams are hoping that these restructurings will boost lagging stock prices as well.
So why spin off? And will it really benefit shareholders? Companies that are contemplating a spinoff use various arguments to justify this corporate restructuring. Some firms have disparate businesses that have little in common and splitting them apart allows the management team to operate with greater focus, and hone in on the new spinoff's core business.
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The second argument is that splitting the company into two or more parts provides greater transparency for investors in valuing the businesses in the public markets. After the split, advocates of spinoffs claim that the sum of the value of the separate parts will exceed the whole. (For more insight, see Parents And Spinoffs: When To Buy And When To Sell.)
Tyco International (NYSE:TYC) announced in April 2010 that the company would spin off its electrical and metal products business to shareholders sometime in the first half of fiscal 2011. The company's electrical and metal products segment and designs and manufactures galvanized steel products for sale to various industries; it recorded $1.4 billion in sales in 2009.
This business depends, in part, on residential and commercial construction activity, which is currently at the low point of its business cycle. Profitability here is also driven by the spreads between what the company pays for copper and steel and what it can sell it for.
Another major company planning a spinoff is Motorola (NYSE:MOT). The company has talked about a spinoff of various divisions over the years, only to be derailed by falling markets or other events.
However, the company has finally made the decision to move forward, and in early 2011, Motorola will be splitting into two separate companies. The company's mobile phone and home businesses are being spun out of Motorola into a new company called Motorola Mobility. The present company will change its name to Motorola Solutions, and retain the balance of the company, except for the networks division, which is being sold to Nokia Siemens Networks, a joint venture between Nokia (NYSE:NOK) and Siemens AG (NYSE:SI).
One angle that Motorola used to justify the spinoff was the customer focus of the businesses; Motorola Mobility is focused on the consumer, while Motorola Solutions focuses on the government and enterprises for sales.
Smaller companies area setting up spinoffs as well. Sun Healthcare Group (Nasdaq:SUNH) is separating the company's real estate into a publicly traded real estate investment trust (REIT). Sun Healthcare Group owns and operates nearly 100 nursing homes and assisted living centers across the United States.
Sun Healthcare Group believes the value of the real estate holdings that the company owns is not being recognized by the market, and hopes the separation will remedy that oversight. The new company will be called Sabra Health Care and the spinoff will be completed sometime in October 2010.
The Bottom Line
Many companies are relying on spinoffs to boost stock price, something the market has refused to do. Keep an eye on these these companies and their new spinoffs for new investing opportunities. (To learn more about spinoffs, take a look at Cashing In On Corporate Restructuring.)
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