Spin-off trend isn’t just for investment bankers
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Conglomerates, even relatively focused ones, are out of favor. Hence companies from Hewlett-Packard to Kraft Foods to ConocoPhillips have in recent weeks decided to split into pieces. It’s tempting to think only Wall Street’s bankers, who helped stitch these hulking groups together in the first place, benefit most from this trend. But a couple of big examples — Marathon Oil and Motorola — suggest investors do well too.
The magic does seem to need time, and concrete results, to work. Shares in HP and ConocoPhillips, for instance, have underperformed the broader market since their separation announcements. They only announced their plans to break into two this month and last, respectively, and they haven’t yet shown they can deliver. (HP’s share price is also affected by the expensive acquisition it unveiled at the same time.) Kraft stock is up a bit in market-adjusted terms, but shares of Fortune Brands, whose breakup has been in the works all year, are still below where they started.
By contrast, Marathon Oil, which announced a division of its upstream and downstream activities in January and completed it within six months, is a different story. Shareholders who now hold stock in Marathon Oil and Marathon Petroleum have paper worth around 10 percent more than it was just before the split was announced — and more than 15 percent more on a market-adjusted basis because the S&P 500 has fallen since the start of the year.
Owners of Motorola, which split into Motorola Mobility and Motorola Solutions in January after almost three years of preparation, now hold stock worth over 20 percent more, market-adjusted, than it was before the split was set in motion in March 2008. The gain didn’t emerge until after the split was completed. Much of it, in fact, is due to Google’s recent deal to buy Mobility, which came at a 63 percent premium. But that’s often precisely the point of splitting — it makes the individual pieces more appetizing.
Investors may get impatient waiting for announced separations actually to happen. And some, even then, may never see much benefit. But while more focused businesses are in fashion, the numbers from a pair of major splits suggest it’s worth investors’ while to hang on — at least until after the splits are complete.