Two recent restructuring announcements have elicited very different responses from the market, perhaps indicating that not all investors favor the current trendy wave of spinoffs that has enveloped the market over the last year.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Alexander & Baldwin (NYSE:ALEX) announced in December 2011 that the company would separate into two publicly traded companies through a spinoff of the company's transportation businesses. The market reacted favorably to this news, and bid the stock up 17% by the end of trading, the day after the news became public.
Comverse Technology (Nasdaq:CMVT) made a similar announcement in January 2012, announcing its intention to distribute 100% of the company's Comverse, Inc. subsidiary to shareholders. This subsidiary is involved with providing billing and customer management software and services in the telecom services industry.
Investors promptly sent the shares of Comverse Technology down by 6% over the next two trading days after this announcement. The market speculation was that investors preferred a sale of this subsidiary rather than a spinoff. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)
The public market has been inundated with companies deciding that the proper future strategic course is to separate into independent companies. The energy sector has been hit particularly hard with this trend over the last year, with ConocoPhillips (NYSE:COP) announcing a separation of its upstream and downstream segments, with this separation expected to be completed sometime in 2012. Marathon Oil (NYSE:MRO) took the same strategic path and completed a similar separation in mid 2011.
One justification usually given for any proposed separation by a public company, is increased focus by management and the board of directors of the newly independent entities. Let's be honest here and say that a typical board of directors is not very involved in the management of a company and serves mostly to rubber stamp decisions of management. The oversight responsibility of the board is also exercised rarely and usually only when things have deteriorated so badly that it's too late to do much good anyway.
This brings us around to more management focus. My feeling is that if getting paid an annual salary in the low seven-figure range is not enough to make a CEO and his team focus, then maybe it's time to bring in a management team that can produce for this level of pay.
Most other reasons given for restructuring separations have little to do with how well a company operates its business, and are related to satisfying the whims of the investment community, most of whom are focused on short term performance. These include additional research coverage by the sell side, separate stock for acquisitions and greater appeal to investors looking to invest in a particular business.
The Bottom Line
The market response to two recent restructuring announcements might demonstrate investor fatigue with the recent separation trend in the market. This would be a welcome event, as the justification for this strategy is reflective of the short term thinking of most market participants. (For more, see Cashing In On Corporate Restructuring.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.