In matters of romance, breaking up may be hard to do. But when it comes to business, corporate chieftains suffer little separation anxiety. Last year, 65 publicly traded firms broke up or spun off some of their units (the most since 2000), and as many as 55 firms may do so this year, says Joe Cornell, editor of the Spin-Off Research newsletter.
Quiz: Wall Street Truth Or Bunk
Investing in spin-offs has been rewarding. Over the past five years, the Bloomberg U.S. Spin-Off index returned an annualized 25.1%, compared with 16.9% for Standard & Poor’s 500-stock index. The index tracks the prices of shares in newly spun-off companies, from the first trading day to the end of their third year of independence. Over the same period, Guggenheim Spin-Off ETF (symbol CSD), an exchange-traded fund that tracks up to 40 spin-off stocks, earned 20.3% annualized. (Returns and share prices are as of June 5.)
To make money, look for a breakup that makes strategic sense. In a sound deal, a sprightlier parent company can focus on its core business, and the jettisoned firm can escape the shadow of its parent and grow on its own merit. Of course, not every breakup is a winner. “Some can create shareholder value, and others are just rearranging the deck chairs on the Titanic,” says David Berkowitz, co-chief investment officer of the RiverPark Funds. Plus, the price has to be right. You can buy before the split or after, but “valuation always matters,” says William Mitchell, a hedge fund manager who specializes in spin-offs.
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One promising breakup is the plan by eBay (EBAY, $63) to spin off its PayPal unit later this year. Though details aren’t out yet, the two businesses may be better off apart. By spinning off fast-growing PayPal, eBay can focus on its struggling online-auction business. We’re not endorsing eBay because we think the stock, which has jumped 32% since mid October, is too pricey. Using a “sum of the parts” calculation, newsletter editor Cornell thinks eBay is worth $60 a share.
Danaher (DHR, $86) is a better bet. Arguably one of America’s least-known industrial giants (its market value is $61 billion), the Washington, D.C.–based conglomerate announced plans in May to split in two. One firm will retain the Danaher name and focus on the rapidly growing science and technology businesses (including Pall, a maker of filtration and purification systems, which Danaher is buying in a deal expected to close before year-end). The other firm, whose name has yet to be determined, will hold Danaher’s steady, highly profitable industrial businesses, including the unit that makes testing and measurement instruments. The breakup, which is likely to occur in late 2016, will allow both sides to rev up acquisitions and spur growth, says UBS analyst Shannon O’Callaghan, who pegs Danaher’s worth today at $94 per share.
Cornell favors two other upcoming breakups: Barnes & Noble (BKS, $25) and SPX Corp. (SPW, $74). B&N plans to spin off its college stores as Barnes & Noble Education in August. Cornell thinks the book-retailing and campus-bookstore businesses combined are worth $27 a share. After the split, the ailing bookseller will be able to focus on reviving its stores and its ho-hum Nook e-reader. And the Education division, which the firm says reaches 24% of students in the U.S. with its 714 campus stores, is one of the largest contract operators of campus bookstores in the U.S.
SPX, a conglomerate that makes, among other things, processing systems for the food industry and cooling systems for power-generation plants, plans to spin off its flow-control business this year. That unit, which accounted for 55% of SPX’s sales in 2014, makes products that are used to process, blend and transport fluids for various industries. Cornell thinks SPX’s parts are worth $86 a share in total.
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