Spinoffs Become Hot Stock-Price Strategy

Sept. 24, 2011 — -- Companies spent the last few years cutting costs. The next frontier appears to be finding ways to cut their businesses into pieces.

Netflix, Tyco and McGraw-Hill are recent examples of companies breaking themselves into pieces either as restructuring — as in the case of Netflix — or full spinoffs. Companies are betting investors will pay higher stock prices for more discrete businesses than they do for consolidated ones.

Companies have announced 38 spinoffs and split-offs in the U.S. this year, the first annual uptick since 2007, says Richard Peterson of Standard & Poor's Capital IQ. The number of spinoffs already exceeds the 35 in all of 2010, Peterson says. Companies ranging from Sears to Sara Lee, Kraft and American Airlines owner AMR have announced spinoffs this year, Spin-Off Advisors says.

"The idea is to create smaller and more focused businesses," says J. Randall Woolridge, finance professor at Penn State University. Companies are splitting up to try and:

•Win greater appreciation on Wall Street. Tyco's first major spinoff in 2007 increased the market value of the company's pieces, says Joe Cornell of Spin-Off Advisors, so it was natural to do it again. In 2007, Tyco spun off its health care and electronics units, leaving the rest as Tyco International. In the latest move, announced Monday, Tyco splits in three again, breaking off its ADT home security business, flow control and the remaining fire and commercial security business.

•Set up for the future. Netflix's move isn't a spin-out, but an internal division of the DVD rental and video streaming business in the same company. The move is an effort to position each unit to stand on its own, says Edward Williams, analyst at BMO Capital. While the company says it's not in the works, the move could allow Netflix to spin off or sell the DVD business, Williams says. Companies are looking to spinoffs as a way to prepare units they can do without for sale, Cornell says.

•Appease activists. Investors looking for companies to unlock value see spinoffs as a quick fix, Cornell says. Shareholders at McGraw-Hill pushed for such a move, and they got one last week, when the company said it's dividing its education business from its market information unit. "Companies are feeling more comfortable doing this," Cornell says. "It's getting busy in the spinoff space."