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The art of the spin-off

Posted by Joe Cornell, CFA on Fri, May 03, 2013 @ 10:05 AM

Joe Cornell, Spin-Off Research, Spin-Off Advisors, Spin-Off, Spinoff, Carve-out, ipoTips for creating new companies out of old ones

May 4, 2013 | The Economist

IN THE entertainment world spin-offs are the offspring of hit shows. You take popular characters and give them their own programmes, or mature franchises and give them a new twist. Thus “Friends” gave birth to “Joey” and “Are You Being Served” to “Grace and Favour”. Such spin-offs usually flop.

In business, spin-offs are the offspring of established companies. You take a division and turn it into a free-standing firm. Thus Bristol-Myers Squibb, a drug firm, spawned Zimmer, a maker of artificial joints, and Tyco, a conglomerate, sired ADT, a maker of by Text-Enhance">security systems. These spin-offs have a much better record.

So far this year there have been 11 big American spin-offs, a number that has steadily inched up in recent years, according to Spin-Off Advisors, a consultancy. Two more loom: Time Warner is preparing to jettison its magazine business, which includes Time, and News Corporation is preparing to spin off its publishing division, which includes the Wall Street Journal, the Sun and the Times of London.

Investors like spin-offs because they prefer focused companies to diversified ones. Financial engineers like them because, under American law, they are more tax-efficient than straight sell-offs, which incur capital-gains tax. Spin-offs represent a welcome alternative to initial public offerings, which are rare and unpredictable. They also offer tasty returns. Forbes calculates that American companies completed more than 80 spin-offs worth at least $500m each between 2002 and 2012. The parent companies (or “spinners”) have delivered a return of 35%, compared with 22% for the S&P 500. The “spun” have delivered a return of 70%. Returns for firms in the Bloomberg Spin-Off Index were 47% over the past 12 months compared with 16% for the S&P 500.

Managing spin-offs is tricky, however. Companies can appear to be tossing out the “trash” and keeping the “cash”. They can damage long-standing relations with employees, investors and suppliers. Both spinners and spun are odd hybrids: new companies with long histories; independent entities that have close ties with each other. How to manage these problems? One of the biggest spin-offs of recent years offers hints.

by Text-Enhance">ITT (née International Telephone & Telegraph in 1920) was once one of the world’s leading conglomerates. In the 1970s it had more than 2,000 units, in every business from rental cars (Avis) to baking (Wonder Bread) to hotels (Sheraton). But in the past two decades it has seen more splits than an amoeba porn flick, to borrow an image from Gary Larson, a cartoonist. In 1995 ITT divided into three firms, including an industrial group that retained the name. In October 2011 the surviving ITT split into three again: ITT Corporation, a maker of sophisticated pumps, brake pads and valves; Xylem, a water-technology company; and ITT Exelis, a defence company.

Veterans of the various ITT splits are justly proud. Managers boast that they have been engaged in corporate regeneration, not just rebranding. They had a rare chance to ask what businesses they were in, and why. They can now focus on their prize products (such as Exelis’s night-vision goggles) as never before. Yet the splits were as emotional as any divorce; or as scary as leaving the parental home. To make it all go smoothly, managers have had to make some delicate calculations.

The various companies involved have had to think hard about establishing their new identities. In many ways creating new companies out of existing ones is harder than creating new companies out of nothing. Each spawn of a spin-off must avoid disparaging its aged parents. And each spinner must give the impression that it is a new organisation, not the trash the dustman left behind. All must think carefully about their relationships with each other and with their existing suppliers.

ITT’s offshoots summoned all the dark arts of brand management to establish their new identities. The energy they put into inventing new names and tag lines would have lit up every Sheraton on Earth. Xylem considered 1,000 different names and agonised endlessly about its tagline, “Let’s Solve Water”. (Unkind observers wish they had agonised a bit longer.) Exelis announced its arrival by choosing a daring corporate colour—orange—in an industry where everybody deals in black, blue or red. But at the same time the spin-offs emphasised their common roots (“One history, three futures”) and their hybrid nature as start-ups and veterans (“a start-up with a 50-year past”).

You spin me right round

The various ITT companies have to work out how to handle their established relationships. They don’t want to alienate people they have been doing business with for years. Nor, however, do they want to be trapped in their old skins. The most ticklish relationship is with employees. Managers have been at pains to explain what was going on, partly to bolster morale but also because employees are the most important brand ambassadors. No detail was too small to bother with. Exelis made its employees hand in their old knick-knacks—such as pens and mugs that bore the old logo—and issued them with new ones. It also held parties to celebrate the birth of the new firm.

The impending spin-offs of News Corp’s newspapers and Time Warner’s magazines have made journalists gloomy. The scribblers fret that they are being consigned to dead-end companies—a fear hardly soothed by analysts who refer in private to “Good Corp” (new media) and “Crap Corp” (print). They also worry that they will have to cope with managerial chaos and technological disruption. But history shows that everyone involved in a spin-off can benefit. And ITT’s experience suggests that good managers can minimise the disruption involved. Breaking up may be hard to do, but it is sometimes necessary.

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View this article from The Economist May 4, 2013 Issue on economist.com:

The Economist: The art of the spin-off








Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog enteries are delayed.  Subscriber-base receives the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Tags: ADT Spin-Off, ITT Spin-Off

The Unknown Life Insurer

Posted by Joe Cornell, CFA on Mon, May 20, 2013 @ 10:05 AM
Spin-Off research


Newly public life-insurer and retirement-services outfit ING U.S. is undervalued and misunderstood, trading at half the valuation of some of its rivals. Why the shares could rise 30%—or more in a takeover.

Even after a nice rally this year, life insurers carry some of the lowest valuations in the stock market based on such measures as price-to-earnings and price-to-book value. The newly public ING U.S. (ticker: VOYA) looks even cheaper. Much cheaper, in fact.

The average U.S. life insurer trades at about book value, based on a conservative measure that excludes unrealized investment gains. ING U.S., which was fetching just $24.70 on Friday, trades for 60% of its estimated book value of $41—and well below its total book value of $55, including unrealized investment gains.

ING U.S. is a little-known and largely misunderstood company. Cobbled together through acquisitions by ING Groep (ING), the big Dutch financial-services company, ING U.S. is more of a retirement-services specialist and asset manager than a traditional life insurer. Retirement specialists like Principal Financial Group (PFG) and investment managers typically command higher valuations than straight life insurers because they generate fee income that gets a lift when markets rally.ING Spin-off, Spin-Off Research

AS PART OF A RESCUE package from the Dutch government in 2008, ING was required to shed its insurance and asset-management business. Its plan to spin off ING U.S. was approved by the European Commission last year. The shares came public on May 1 at $19.50. ING still holds 75% of ING U.S.

ING CEO Jan Hommen called the forced sale of ING U.S. "significant destruction of capital."

The forced sale of the U.S. life-insurance assets wasn't favored by ING Groep CEO Jan Hommen, who called it "significant destruction of capital" at the company's recent annual meeting. ING Groep is required to reduce its stake in ING U.S. to 50% by year-end 2014 and be out of it completely by Dec. 31, 2016.

Spinoff & Reorg Profiles analyst Bill Mitchell recommended ING immediately after it went public, below the anticipated range of $21 to $24 a share. He wrote that his bullish call was a rarity for "a promoted public offering. More often than not, IPOs are a bad deal, due to asymmetric information, moral hazard, face-ripping underwriters....We make an exception...because VOYA looks cheap; we believe that it looks cheap because the parent is in a hurry to satisfy EU regulators with a breakup."

Mitchell says, "It's so cheap that you can overlook its visible flaws." The flaws mainly are on the life-insurance side, including variable annuities.

Spin-Off Research thinks the stock is worth $31.50.

It could be worth even more in an acquisition. With a market value of $6 billion, it would be easily digestible for a large insurer.

In its prospectus, ING noted that it has 30 projects across the company to boost returns and that its goal is to lift its "operating return on capital from our ongoing business" to 10%-11% by 2016 from 7.2% last year.

The Bottom Line

With complex financials and concerns about its variable annuities, ING U.S. trades at a deep discount. Shares could rise 30%—or more in a takeover.

ING's financials are tough to assess, due to a headache-inducing 522-page IPO prospectus that carried multiple definitions of profits, arcane life-insurance terms, and nonstandard financial measures, like "operating return on capital from ongoing operations," as well as the muddying effect of hedging gains and losses related to the closed block of annuities.

ING U.S. said in the prospectus that it expected to earn about $280 million from its core operations in the first quarter; complete results are expected on May 23. Annualize that and make an assumption on taxes and corporate expenses, and the annual earnings power appears to be $2.50 a share. The company declined to comment.

Negatives include low returns and overhang of stock from its parent. Also, ING U.S. lacks the brand power of MetLife (MET) or Prudential Financial (PRU).

CALLING ITSELF AMERICA'S Retirement Company, ING U.S. has a retirement-services unit that administered $214 billion of assets on Dec. 31, 2012, and managed $117 billion. Focused on small to midsize companies and government entities, it covers five million plan participants. It also manages $22 billion in retail mutual funds. Retirement services and investment management account for about 70% of operating profits.

The company's millstone is $42.5 billion of older variable annuities. These investment products, with attractive features involving death benefits and guaranteed returns, were sold to individuals. Those guarantees came back to haunt insurers when the bottom fell out of the stock market, and insurance regulators and the rating agencies required that sizable reserves be set aside against these policies.

ING and some other insurers have segregated pre-2009 variable annuities into so-called closed blocks, assigned reserves to cover potential guarantees, and have sought to hedge market risk. ING U.S.'s $6 billion reserve, plus hedges, seems adequate, especially with the stock market on the rise.

All of the baggage associated with ING U.S. masks a healthy core business, plus a management team determined to improve returns. This may create a good investment story given the discounted price of ING U.S. shares.

Stealth Retirement Play

ING U.S. is the cheapest stock in a cheap sector, based on price-to-book value. Retirement services and asset management comprise about 70% of operating profits.



YTD Change



Book Value**

Value (bil)








Hartford Fin/HIG







Principal Fin Grp/PFG














Prudential Fln/PRU







E=Estimate *Since May 1, 2013, IPO. **Excluding investment gains (AOCI).
Source: Company reports; Bloomberg


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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog enteries are delayed.  Subscriber-base receives the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Tags: ING Groep Spin-Off, ING US