Spinoffs Becoming The Rage

By Eric Fox | April 03, 2011 AAA

The spinoff craze is once again sweeping across the markets as managements look to increase shareholder value. The trend cutting across all sectors, industries and capitalizations.
TUTORIAL: Mergers and Acquisitions: Introduction

Justification
Companies generally justify these actions as a means for management to focus on its core business, and as an opportunity for the market to more properly value a set of businesses that are unrelated. After the spin-off, these pure play businesses sometimes attract takeover offers once they separate from the parent companies. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)

Completed
The largest and most recent spin-off that has been completed was Northrop Grumman's (NYSE:NOC) spin off of Huntington Ingalls Industries (NYSE:HII), a company involved in the shipbuilding business. The new company reported $6.7 billion in sales in 2010, and shareholders of Northrop Grumman received one share of Huntington Ingalls Industries for every six shares owned of the parent. Many investors and analysts see this action as unleashing a torrent of spinoffs from other defenses contractors as they jettison unrelated business units.

Recent Announcements
The most recent announcement of a spinoff came from Siemens AG (NYSE:SI), the giant German conglomerate. The company is conducting an initial public offering of its Osram unit, which makes light bulbs, fixture and car headlights. Osram is only a small piece of Siemens, and accounted for $6.6 billion of the company's overall sales of $107 billion in 2010.

Other Sectors
No sector has been immune from this trend over the last year. In the energy sector, Marathon Oil (NYSE:MRO) is keeping its upstream segment and spinning off its refining and other downstream assets into Marathon Petroleum Corporation.

Sunoco (NYSE:SUN) recently filed for a $100 million IPO of Sun Coke Energy, its metallurgical coke business. The company will still own 80% of Sun Coke Energy after the offering. Tesoro (NYSE:TSO) is planning a $300 million IPO of its Tesoro Logistics LP segment, which owns crude oil and logistics assets across the United States.

Spin Off Candidates
One company that has been the subject of speculation on a possible spin off of some of its businesses is Pfizer (NYSE:PFE), the large pharmaceutical company. Pfizer has large operations in the nutritionals, consumer health and animal health businesses, along with revenues from generic and off-patent drugs.

Another option for Pfizer is the outright sale of distinct business units. The company just announced the sale of its Capsugel unit, which makes capsule products and services to regulate the correct dosage of drugs and other medicines. The company sold the unit to a private equity firm for $2.38 billion.

The Bottom Line
While many investors back these types of reorganizations as a method of increasing value, one could also come to a less flattering assessment of the motivation for a spin-off.

Many companies might be seen as pandering to investors that are agitating for a short-term catalyst to ignite the stock, without regard for the long-term impact on the company. This is sometimes done at the urging of investment banks eager for the substantial fees generated from underwriting and other activities associated with these types of corporate actions. (To learn more, see What Are Corporate Actions?)

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