Do Breakups Unlock Shareholder Value?

Worth examining are the dynamics of the company’s industry, and the level of competition in the industry, he adds. “For example, the upcoming MCI tracking stock issued by WorldCom is one to avoid,” says Minichello. “Growth rates are declining in that industry ad margins are falling — that’s a bad sign. WorldCom itself still has potential, but you’ll need to think hard about the tracking portion.”

As a rule, corporate breakups are designed to unlock the value of core companies and subsidiaries. But without fundamental change, breaking up a bad company only produces more bad companies, argues Adrian Slywotzky, vice president at Mercer Management Consulting, a corporate strategy firm in Boston. “When there is a breakup investors should ask if anyone is fixing the business model, and if not there won’t necessarily be any shareholder value,” he says.

Indeed, breakups can unleash problems for investors, advises Stephen Barnes, a portfolio manager at Barnes Investment Advisory in Phoenix. Each shareholder trades their original shares for a share in each of the new companies; the general idea is that the value of the divided companies is more than their combined entity.

Up-and-Comer or Also-ran?

But investors should also look at how the company will be financed and examine the pedigree of the new management team, adds Barnes. “Don’t just look at the new company’s market valuation. Look at what its market position will be and its opportunity in that market — will it be an up-and-comer or an also-ran?”

Like AT&T, which will now break up into a consumer telephone business, represented by a tracking stock, and independent stocks representing the company’s wireless and broadband cable divisions, other companies have been busy dividing.

“The notion peddled by investment banks has been that size is the cure for every problem but it actually makes things worse in most cases,” says James Brock, a professor of economics at Miami University in Ohio. “My take is that the virtues of megamergers and gigantism have been oversold and suddenly people are beginning to say this in invalid and it doesn’t work and the emperor has no clothes.”

Indeed, the rash of restructuring is designed to please Wall Street and investors and help companies’ ailing stock prices, says Jeffrey Kagan, a telecom analyst at Kagan Telecom Associates in Atlanta. AT&T’s stock has dropped from just under $50 in early May to its recent price of just above $20. Similarly, WorldCom recently warned of a weakening business, and said that it also plans to restructure its business as a result. These companies are doing exactly what investors have been asking for, says Kagan: “It’s the tail wagging the dog.”

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