Do Breakups Unlock Shareholder Value?

Call it the modern business equivalent of the myth of Sisyphus.

Having spent billions of dollars building up its business under Chairman Michael Armstrong, AT&T now plans to pare the business down to four separate companies under the AT&T name. On top of that, the company said its board voted to spin off Liberty Media Group.

This is not the company’s first reorganization. An antitrust settlement with the government in 1984 caused the company’s breakup into the seven regional Baby Bells, and a further voluntary break up in 1996 created Lucent Technologies and NCR.

AT&T is not alone. Recently, Lucent spun off corporate telecommunications company Avaya, business information company Dun & Bradstreet divided itself into an operating company and the debt ratings agency Moody’s, and 3Com Corp spun off its Palm Inc. division in March.

Corporate breakups, including spin-offs (when a subsidiary is spun off from its parent), equity carve-outs (full or partial public offerings) and the issuing of tracking stocks, are all the rage on Wall Street. So far this year, 110 deals have been announced, with about 60 completed, making for another record year. In 1999, there were 71 announced spinoffs with 66 companies following through.

Unlocking Shareholder Value

The deals are typically touted as meant to “unlock shareholder value,” but are they any good for shareholders?

Generally, yes, believes Mark Minichello, a principal at Spin-Off Advisors LLC, an investment research boutique in Chicago. Minichello says these deals are good news for both parent companies and investors, and the proof is in the market returns.

Investor pressure is driving these breakups, explains Jeff Stewart, chairman of the corporate law department at Arnall Golden Gregory LLP in Atlanta. Until very recently the belief was that big companies held a bigger the share of the market, and could spread costs and increase profits, he says. But the tide is now turning, and the trend today is for nimbler, more focused businesses.

“There are cycles and seasons, and there are periods of consolidation in industries and businesses,” Stewart notes. Today, the fashion on Wall Street seems to be for valuing the parts of a company more than the whole and the hope is that when taken as a whole the separate companies will be worth more than if they were under one umbrella, he adds.

Through the third quarter of 2000, corporate breakups completed in 1999 have since handily beaten the S&P 500’s return, generating an increase in market value of 106 percent for spin-offs, 71 percent for tracking stocks, and 68 percent for carve-outs, according to data from Spin-Off Advisors.

VoiceStream Wireless, which was spun off from Western Wireless Corporation in May 1999, posted the largest spin-off gain by increasing over 400 percent.

Pitfalls for Investors

But investing in restructuring companies can be tricky, and so it is worth doing some advance planning before investing in a deal, warns Minichello. There are many diamonds in the rough, he says, and investors must do their homework in order to find them.

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