Are Spinoffs the New Way for Shareholders to Get Value?

Spinoffs are the new synergy. In the past companies have melded into large conglomerations to eliminate redundancies, but now corporations are dividing lines of business into separate business entities. Companies such as Kraft (NYSE:KFT), Sara Lee (NYSE:SLE), McGraw-Hill (NYSE:MHP), Expedia (NASDAQ:EXPE), Conoco Phillips (NYSE:COP), and most recently Abbott Laboratories (NYSE:ABT) are at the forefront of this trend reversal.

There are several theories about why this is occurring. The first is that mergers and acquisitions are down nearly 25% this year. CNN Money quotes Joe Gromacki, an M&A attorney with Jenner & Block as saying “Even the deals that do get done are taking much longer. Spinoffs may be preferable to auctions or other sales processes because they are internally driven, without a counterparty that may be susceptible to public-market volatility.”

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CNN Money’s Dan Primack also suggests the reason for the spinoff fad could be so that companies can boost stock prices. “Take the case of McGraw-Hill (NYSE:MHP), which announced plans to spin off its education business in September. The company’s shares closed up 4% on the day of the announcement, and finished the week up nearly 17%. I’m not suggesting that such massive decisions are primarily driven by short-term share juicing, but I’m also not so naive as to ignore its role in the final calculus.” Primack ends by saying, whatever the reason, spinoffs are good for the US economy because they create more jobs to heal the ailing unemployment rate.

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