Tags: Sterman | spin-off | parent | EMC

StreetAuthority's Sterman: Activist-Inspired Company Spin-Offs Are Making Investors Richer

By    |   Monday, 20 October 2014 02:32 PM

Corporate spin-offs are at their highest levels in decades, with activists such as billionaire investor Carl Icahn diving into the fray.

Dialogic data shows $1.6 trillion of spin-offs — the highest total since 2007 — have been announced in 2014 so far, according to StreetAuthority columnist David Sterman.

Sterman noted ITT was only one of the conglomerates that ended up spinning off its pieces in the 1970s, and the ultimate result was new successful stand-alones such as Avis, Sheraton and Hartford Insurance Group.

"Now, Carl Icahn is taking the de-conglomeration theme one step further: He's imploring companies to spin off key divisions as a way to boost shares." Sterman wrote.

"He rattled eBay Inc.'s cage for nearly nine months, pushing the e-commerce company to spin-off its PayPal division. When eBay relented on Sept. 30, announcing such a plan, its shares rose nearly 8 percent."

Other activists recently pushed Hewlett-Packard to spin off its printer business, a step HP has now agreed to.

Spin-offs are one way for companies to unlock value for their various pieces, he noted.

The tactic can yield riches, and Sterman identified three companies that could profit from such a move.

One logical candidate to shed a highly valuable asset is EMC Corp., which owns an 80 percent stake in data visualization firm VMware.

Activist investor Elliott Asset Management has been pushing EMC to sell its VMware stake and realize a huge profit and "look for an asset monetization strategy for EMC's pivotal software development business and its RSA security management business."

"Merrill Lynch, which spots several catalysts capable of helping VMware boost sales another 15 percent in 2015, to around $7.8 billion, thinks the company is worth around $120 a share, or roughly $50 billion. That would value EMC's stake at around $40 billion, not far from the company's $55 billion total market value," Sterman explained.

Another company that could benefit from a spin-off of assets is Yum! Brands, according to Sterman.

While Yum has a current market cap of approximately $29 billion, Oppenheimer estimates its KFC/Pizza Hut business is worth $17 billion, Taco Bell is worth $6 billion and Yum's Asia operations could fetch $15 billion to $22 billion. In other words, a break-up and sale of the Yum pieces could fetch somewhere between $38 million and $45 million, according to Oppenheimer's rationale.

Finally, Sterman listed Masco, owner of a wide range of home building, plumbing and household supplies, as another logical candidate to spin off some of its units to generate unlocked profits.

"Spinning out assets reduces the managerial oversight necessary to run a sprawling set of divisions and can lead to an improvement in operating margins. That's why many companies are now taking a fresh look at their corporate structure as a way to unlock shareholder value," he noted.

The New York Times also noticed the pick-up in corporate spin-off activity.

"Most spinoffs are beneficial to the company being spun off and to the parent company," Olav Sorenson, a professor of management at Yale University, told the Times. "There's an increase in sales and profit growth. It does seem to be more than investors liking it."

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Corporate spin-offs are at their highest levels in decades, with activists such as billionaire investor Carl Icahn diving into the fray.
Sterman, spin-off, parent, EMC
Monday, 20 October 2014 02:32 PM
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