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Take another spin

28 December 2011 By Jeffrey Goldfarb

In mergers and acquisitions, 2011 will go down as the year of the spinoff. Activity is on pace to hit $230 billion – six times 2010’s total and approaching a whopping 8 percent of global deal activity, according to Citigroup. With rocky economic conditions unlikely to give chief executives much reason to go shopping, 2012 could bring still more splits.

The market has been in an anti-diversification mood. Just seven months after Motorola completed its spinoff of Motorola Mobility in January, Google saw fit to pay $12.5 billion for the newly independent mobile phone company, a 63 percent premium to where the stock had been trading. Shares of Motorola Solutions, meanwhile, have gained 25 percent in a flat year for the S&P 500.

The trend hasn’t much discriminated by industry or country of origin. Fiat, ConocoPhillips, Kraft, ArcelorMittal and McGraw-Hill were among big companies that sought to shed non-core units in the hope of eliminating valuation discounts. Their spinoffs will inspire others to follow suit. Maybe even other large holdouts will, too.

In the oil patch, the value gaps between integrated operators and independents are getting harder to miss. Carve-ups should pressure the likes of Exxon Mobil to consider seriously the benefits of separating exploration from production. Similarly, it might be time for Pepsi to spin off its salty snacks. That business is leading the company’s shares to trade more like a slow-growth food company than its better performing beverage peers.

The ranks of true conglomerates also have been thinned by three-way breakups at ITT and Fortune Brands. General Electric’s shareholders might be envious. With GE stock down by half over the last decade, investors probably wouldn’t miss the refrigerators-to-credit cards model. Meanwhile, succession plans at Berkshire Hathaway have reopened questions about whether Warren Buffett’s motley collection of assets might fare better separated.

For News Corp., a split would come better late than never. Boss Rupert Murdoch may love newspapers, but they detract from the value of his more attractive TV and satellite businesses. And Goldman Sachs won’t tolerate its stock trading below book value forever. The bank likes to boast of its triumphs over crises. Pulling off another may require something bold like a breakup.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book,’ produced in print and electronic form early in the New Year.


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