Breaking up can be hard to do, but in 2014, spinning off less profitable divisions that aren’t core to one’s business proved a popular way to unlock value. Among the year’s highest-profile spinoffs: eBay’s plan to carve off PayPal; HP splitting its PC and printer businesses from its corporate hardware and services operations; and BHP Billiton, which succumbed to investor pressure to cut loose its less lucrative assets and piled them into a separate company. A rise in activist investors pushing companies to become hyper-focused on their main businesses is helping drive this trend. Another is the fact that some firms simply can’t find willing buyers for their assets. Whatever the reason, we can expect to see more offshoots in the years to come.
That’s not to say all corporate spinoffs create value. Encana learned this the hard way when it spun out its oil assets to form Cenovus in 2009, leaving it exposed when the bottom fell out of the natural gas market. Energy and mining firms have a habit of clustering spinoffs to capitalize on the market highs, says Jim Osman, CEO of Edge Consulting Group, a research firm that focuses solely on spinoffs and special situations.
It’s important to understand the reason for the split, he stresses. Avoid a move that appears opportunistic, but if there is a compelling justification Osman says it could create a good opportunity for investors. A new report by Edge Consulting and Deloitte that looks at 15 years’ worth of spinoffs found the share prices of parent companies climb an average of 28% two years after a move, while the offshoots jump about 48%. Best of all, many of these deals are telegraphed months in advance, giving investors time to buy in early and the chance to own a piece of both companies.