Healthy Spinoffs, Happy Investors

When Cardinal Health spun off its medical technology and equipment businesses in September as CareFusion, Cardinal, a maker and distributor of medical and surgical supplies, said this action would lead to "enhanced management focus and sharper strategic vision."

It will take time to determine if this spinoff produces enduring higher share prices. However, in the world of high-profile medical deals, the strategy can work very nicely ... at least for the spinoff's shareholders.

Take a look at the table below, which examines some big spinoffs -- as recent as February's Bristol-Myers Squibb (NYSE:BMY) spinoff of Mead Johnson Nutrition or as early in the decade as Merck's (NYSE:MRK) spinoff of Medco Health Solutions. In each case, the spinoff has outperformed the parent.

Sources: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.
Return calculated from closing price of first day post-spinoff through Oct. 9, 2009.

That collection reflects a variety of products and strategies. Mead Johnson had been part of its corporate parent since the old Bristol-Myers bought it in 1967, even before the merger that led to Bristol-Myers Squibb. However, Bristol-Myers hasn't severed ties with Mead Johnson -- it still owns 83.1% of the outstanding stock and has 97.5% of voting power.

On the other hand, Merck bought the Medco Containment Services pharmacy-benefits management company in 1993, but the combination didn't last long. All of the renamed Medco Health Solutions was spun off in August 2003.

What's next?
Spinoffs don't guarantee success. Still, these results should offer an education for shareholders of Pfizer (NYSE:PFE), who wonder if their company can effectively absorb all of Wyeth (NYSE:WYE). The same goes for any Merck shareholders who question if acquiring Schering-Plough (NYSE:SGP) might cause indigestion down the road.

The buyers say they'll keep all of their acquisitions, aside from divestitures required by antitrust regulators. But what happens when the corporate game plan changes? Another spinoff, as executives talk about the strategic sagacity of separating certain business units?

Just remember: Today's spinoff could be tomorrow's takeover target. Exhibit A is Eli Lilly's (NYSE:LLY) 1995 spinoff of medical-device maker Guidant, which was acquired by Boston Scientific in April 2006. I don't know if all investors were satisfied with that one. Guidant shareholders got $42 in cash and $38 in Boston Scientific stock, but that stock is down 54% since the deal closed.

However, I'm sure the investment bankers who engineered both the original spinoff and the subsequent acquisition were happy.

What spinoffs have you participated in, and have they worked out well for you or not? Let us know in the comments section below.