Spin-Off Research In the News

Spinoffs appear to be back in corporate rotation

Posted by Emily Borderie on Fri, Jan 14, 2011 @ 10:01 AM
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Dot-coms aren’t the only financial phenomena popular in 2000 that are coming back into style on Wall Street. Corporate spinoffs are now getting their turn.

Marathon Oil announced plans Thursday to spin off its refining business to focus more on its core business of funding and producing energy.

The energy company’s move comes after industrial giant ITT announced a plan this week to split the 91-year-old firm into three companies. And Motorola just completed its split into two companies.

The recent spate of spinoff announcements breaks a hiatus of such deals, in which a company splits off a part of itself into a separate, stand-alone company.

Last year, 11 U.S. companies completed spinoffs and related deals worth $15.6 billion, Dealogic says. That’s down from 14 spinoffs worth $15.8 billion in 2009 and well below the 90 valued at $62 billion in 1999. This year, though, is off to a brisk start with two spinoffs already completed.

“Companies have been waiting for a time like now with the economy gaining traction, to do spinoffs,” says Joe Cornell of Spin-Off Research. Fanning the pickup in spinoffs:

  • New priorities following the recession. Companies spent a painful last few years figuring out which units were holding them back or didn’t fit their plans, Cornell says. With a strong stock market to sell into, and the Dow Jones industrial average up 79% from its low in 2009, companies can part with these units without settling for fire-sale prices, he says.
  • Greater effort to get more respect from investors. Investors underappreciated Marathon’s lucrative exploration and production business, and fixated on its less-profitable refining units, says Philip Weiss of Argus Research. The spinoff” is a way to recognize that value.” he says.

Similarly, investors saw ITT as a mature industrial company and largely ignored its faster-growing parts, says David Rose of Wedbush Securities. Spinoffs unlock value trapped inside a bigger company, Weiss says.

  • Perception that better focus brings growth. By spinning off businesses that aren’t part of the long-term plan, the remaining company can focus on areas where it will find the most success and growth in the future, says Ryan Mendy of The Spinoff Report. “Spinoffs do work.” He says.

Expect more companies to look to spinoffs to put their retooled strategies, coming out of the recession, into motion, says Cornell, who expects 30 or more spinoffs in the U.S. this year. “were at the beginning of a spin cycle that can last years,” he says.

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