The Next Big Spinoff

Less is more. This seemingly contradictory statement may be the new strategy of Wall Street, as some companies are learning to grow by slimming down. Keen investors stand to profit by keeping their ear to the street.

Many companies are seeing their futures in the form of separate entities, and are deciding to spin off one division or another in order to grow. There are a few reasons a company would choose to do this, but one of the most common is that under independent flags different companies may be able to better focus on their respective goals and market conditions.

Abbott Labs' (NYSE: ABT  ) decision to split into two publicly traded companies is the most recent domino in this trend. Abbott announced that by the end of 2012 they would split into a medical device company and a pharmaceutical company with $22 billion and $18 billion in annual sales, respectively. Though both divisions are involved in the medical field, they have different risk levels and geographic focuses. The medical device division is seen as the lower risk of the two, and is more internationally focused, whereas the pharmaceutical division is higher risk and more U.S.-focused. Is this really enough reason to split? Shareholders seem to think so, as shares initially jumped 5.9% on the news.

Past success
To understand if this strategy has long-term merit, let's take a look into the past.

In 2008, Altria (NYSE: MO  ) spun off Philip Morris International (NYSE: PM  ) into its own company. The decision was made so that Philip Morris could better focus on international growth, and would be insulated from the specter of U.S. litigation. This first reason mimics Abbott labs' own logic for the device-pharmaceuticals split.

The results are hard to deny. Since the spinoff, both parent and newly independent companies have rocked the Dow Jones Industrial Average (Index: ^DJI) and other comparable indexes. From the March 2008 split, Altria and Philip Morris have returned 52% and 61%, respectively, smoking the Dow Jones' 6% return over the same period.



Returns are adjusted for dividends and splits. Figures from Yahoo! Finance.

Another of Altria's spinoffs, Kraft, has seen market-beating returns since being fully sold off. During the almost six years when Kraft was publicly traded but still 88% owned by Altria, the stock underperformed the Dow Jones Index by 1.3%, virtually matching the average annualized return. Since the 2007 spinoff, Kraft's return has been more than triple that of the Dow Jones Index, doing so in only four-and-a-half years.

Apparently Kraft picked up a few moves from its former parent, as the company has recently announced its intention to split into two companies, one focusing on North American groceries, and the other focusing internationally on snack sales.

Everybody's doing it
Spinoff fever extends beyond these few instances; Hewlett-Packard (NYSE: HPQ  ) , the world's largest PC maker by market share, recently voiced interest in spinning off its personal computer division. Just today, Meg Whitman backtracked on the decision, but the consideration of the spinoff in the first place still gives credence to the idea.

Other notable spinoff developments include Pfizer (NYSE: PFE  ) , which has expressed intentions of spinning off its animal health and nutritional division. The deal is valued between $12 billion and $15 billion. The move is believed to be an important step in allowing Pfizer to focus on their core operations of drug development.

Many companies are recognizing that bigger isn't better, and can in fact be cumbersome. Sometimes the best way to combat this is to go in separate directions. There is perhaps no better example than AOL and Time Warner's ill-fated marriage. The media and service provider merger, valued at $162 billion, is the biggest to date in American history. Yet, instead of becoming the powerhouse they planned, the pairing foundered. The move has come to be known as "one of the biggest failures in merger history" as it ended with Time Warner spinning off AOL in December 2009 at a huge loss. Though neither company has outpaced the Dow Jones Index since the division, Time Warner has tracked it decidedly more closely than when it had AOL under its wing and averaged a negative 12.1% annualized return.

It's not you, it's me
Of course splitting up a company is not a one-size-fits-all solution. The recent attempt, and subsequent bungling of the Qwikster Netflix (Nasdaq: NFLX  ) split failed miserably; though the failure of the spinoff is recognized more as a mismanagement of public relations than a poor business choice. In fact, many people believe the move would have been in the best long-term economic interest of Netflix.

How to play it
Investors need to take note of the changing of the guard on Wall Street and invest accordingly. These spinoffs and sales spell huge opportunity for us to pick up newly lean and focused companies. Personally I'm looking to spun off entities with an international focus, like Abbott Labs' soon-to-be-independent medical device segment. Seen as more stable than the pharmaceutical division, and with arguably more growth opportunities abroad, what's not to like?

Foolishly free lunch
Spinoffs aren't the only special situation investors can benefit from. The Motley Fool recently compiled a special FREE report called The Hottest IPO of 2011. In addition to finding out about one killer international play, you'll also get information on the 10 IPOS you don't want to miss out on. Thousands have requested access to this special free report, and now you can access it today at no cost. You can get instant access by clicking here -- it's free!

Foolish contributor Austin Smith owns Shares of Pfizer. The Motley Fool owns shares of Altria Group, Abbott Laboratories, and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Pfizer, Abbott Laboratories, Netflix, and Philip Morris International. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (51)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2011, at 5:58 PM, mike2153 wrote:

    Has any large corporation ever spun off a division and subsequently merged with it again?

  • Report this Comment On October 28, 2011, at 7:28 PM, bugahamike wrote:

    Didn't all the Ma Bells do that to each other at one time or another?

  • Report this Comment On October 28, 2011, at 7:33 PM, mikecart1 wrote:

    mike2153, Apple spun off Steve Jobs in the 90s and created Apple & NeXT. Then they joined together, yada yada yada and now Apple is one of the largest companies of all time.

    :o]

  • Report this Comment On October 28, 2011, at 10:55 PM, svpelican wrote:

    Standard Oil...

  • Report this Comment On October 29, 2011, at 12:28 PM, XMFGatsby1 wrote:

    Spinoffs are the only special situation that investors can benefit from? I think that is a bold statement. I suggest Joel Greenblatt's 'You Can Be a Stock Market Genius'.

  • Report this Comment On October 29, 2011, at 2:41 PM, TMFBWItime wrote:

    @XMFGatsby1.

    Thank you for your comment, though in the last paragraph I wrote that

    "Spinoffs aren't the only special situation investors can benefit from."

    I encourage people to check out the free report linked in this paragraph for more special situation opportunities.

    Fool on!

  • Report this Comment On October 30, 2011, at 12:15 PM, Susan561 wrote:

    Will you inform members when to buy the spinoff? Timing is everything.

  • Report this Comment On October 31, 2011, at 4:25 PM, TMFBWItime wrote:

    @Susan561

    Thanks for your comment, I will probably not be recommending investors pick up shares at a particular time or another.

    Once a company spins off, it usually creates different dynamics than existed previously, each with their own risk / reward profile.

    I encourage investors to watch for spinoffs and make decisions based on their own analysis. You could start with the following considerations as a springboard.

    1) Does the industry the company is moving into have room for growth

    2) Does the company have a superior product or fucus?

    3) What is the new management's track record and relationship with the company?

    Fool on!

  • Report this Comment On November 04, 2011, at 3:15 PM, dil77 wrote:

    happy diwali to all with bst wishes for new year

  • Report this Comment On November 07, 2011, at 7:52 AM, Eerkes wrote:

    Did MO, PM, and KFT ever outperform before they broke up, or only after?

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