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Date: Thu, 5 Nov 92 12:43:43 EST
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11/5/92


TITLE #m#gm#m#Popular Spinoffs Are Buying Opportunities

Lisa Lee Freeman

Spinoffs are all the rage in corporate finance.

This year, an estimated 40 spinoffs will have been announced or
completed, making 1992 a banner year for these transactions, ac-
cording to The Spin-Off Group, an independent financial consult-
ing and research firm in New York. This number is twice the rate
of any other year and six times the average rate for the 25-year
period ended in 1988.  Numerous major companies, including Sears
Roebuck & Co., Marriott Corp., Baxter International Inc., Adolph
Coors Co., Willcox & Gibbs Inc. and Enron Corp., have announced
plans in recent months to cut loose subsidiaries through spinoff
transactions. And that flow of spinoffs isn't expected to ebb any
time soon.  "I expect we will continue to see them because the
economics for shareholders and companies is compelling," said Da-
vid Glassman, partner at the financial consulting firm Stern
Stewart & Co. in New York.  How compelling? For equity investors,
very. Spinoffs almost always result in higher stock prices, ex-
perts say.  "Spinoffs have outperformed every index by extremely
wide margins," said Barbara Goodstein, The Spin-Off Group's
managing director. Based on spinoffs completed during the past 25
years, data show that on average, spun-off entities in the three
years after their divestiture have outperformed "matched" firms
by 34%, she says. Matched firms are those in the same industry
and with a similar market capitalization.  Likewise, the parent
firms of spun-off companies in two years outperformed matched
firms by 27%. Both figures are based on studies done by Pennsyl-
vania State University.

Spinoff announcements almost always are accompanied by an immedi-
ate, sharp rally in the stock. Marriott, for example, has surged
18% in the four weeks since announcing plans to split in two,
cleaving its hotel and food-service management businesses from
its real-estate division.

Typically, stocks return 10% to 20% gains within several weeks of
a spinoff announcement, says Glassman.  However, it is important
to note that during the first few months following a spinoff's
actual completion, the stock of


Popular Spinoffs Are Buying Opportunities

the cast-off entity may encounter some temporary turbulence due
to selling by institutional investors.  Spinoffs, unlike their
former parents, often don't pay dividends that some pension funds
require. Also, the new stand-alone company may fail to meet cer-
tain criteria set by a mutual fund.  A spinoff, technically, is a
form of corporate divestiture in which a parent company cuts
loose at least 80% of a wholly owned subsidiary and distributes
the stock of that newly independent entity to its current share-
holders. In most cases the shareholders receive the shares as a
tax-free dividend.

Impact Of Takeovers

Why do spinoffs perform so well? The single most powerful force
behind the performance figures is takeovers, according to James
A. Miles, a finance professor at Penn State University who has
conducted several studies on spinoffs.  Once a company is spun
off from its parent, it tends to become a more attractive take-
over target. That's because "they're small and digestible and
don't have a historic shareholder base, so they're not suscepti-
ble to attack by shareholders," explains Robert Willens, senior
vice president and tax and accounting analyst at Lehman Brothers
Inc.  A recent Penn State University study showed that of 146
businesses spun off by corporations between 1965 and 1988, 14.4%
were acquired within three years. Also, about 14% of the 131
parent companies in the study were taken over within three years
after executing spinoffs.  Moreover, spun-off entities and their
former parents had a higher incidence of takeovers than other
companies in the same industries. Spinoffs are acquired at four
times the rate of matched firms and their parents are taken over
at about 21/2 times the rate of matched firms.  How else do spin-
offs enhance shareholder value? First, they provide more incen-
tives to executives because their fortunes are tied more directly
to the company they manage through options or stock-purchase pro-
grams, says Willens.  Second, they tend to streamline a company's
management structure. "Prior to the spinoff, the company would
have been a business within the structure of another," explained
Glassman.  "So it has more management layers to go through before
decisions are reached. Spinoffs tend to eliminate some of that
bureaucracy." Thus, he said, "the company tends to be able to
respond more quickly to changes in its markets." Among other rea-
sons, Glassman says spinoffs address the problem of a healthy
business that subsidizes a unit that's performing poorly, drag-
ging down the company's stock price. "The spinoff," Glassman ex-
plained, "severs that subsidy and forces both businesses to com-
pete for capital on their own merits."

Successor To Divestitures


In other words, the spinoff frees a subsidiary to trade at a
price-earnings multiple more in line with those of its peers -
rather than one based on the parent company's overall business.
Spinoffs, Glassman says, are the successor to 80s-style divesti-
tures, where companies would streamline operations by selling un-
its to management or third-party investors. Decreased access to
financing has fueled this transition to the spinoff, he explains.

"The spinoff is the answer to something the LBOs (leveraged
buyouts) accomplished and the result of the reversal of the
mergers and acquisitions of the 80s," added Goodstein.  Not all
spinoffs work out favorably, however.  An example is Henley Pro-
perties Inc., which was cast off from Henley Group Inc. in 1989
and first traded at $10 a share. The company, which changed its
name to Bolsa Chica Co., has since seen its stock erode to below
$1, weighed down by problems in the real estate market and a
heavy debt load.  Henley Group was a conglomerate spun off origi-
nally from Allied Signal Inc. in 1986. Not all spinoffs related
to the Henley Group failed, however. Investors who participated
in the Wheelabrator Technology Inc. deal have nearly doubled
their money.  Bairnco Corp.'s spinoff of Genlyte Group Inc. in
August 1988 is another flop. The lighting- fixture company was
cast off just before the economy slid into a recession, which
pummeled the residential and commercial real estate development
businesses - businesses critical to Genlyte. Genlyte began trad-
ing at $10 a share and is now at about half that.  Keene Corp.
was another Bairnco spinoff that bombed. However, Bairnco also
spun off Kaydon Corp., which was a huge success, according to Ed-
ward Cimilluca, an analyst at Lehman Brothers Inc. The bearing
company's stock began trading at $11/2 in 1984 and is now at $22.
To avoid getting caught in a bad spinoff, it's wise not to buy
them willy-nilly, advises Goodstein. "You have to do your home-
work on every company."

No Guarantee

Spinoffs with the most positive prospects, she says, include
Whittaker Corp.'s spinoff of Biowhittaker Inc., Baxter
International's planned Caremark spinoff and Marriott's recently
announced divestiture.  When spinoffs don't work out, it's be-
cause of unfavorable market conditions or because the business
may have been a "dog" in the first place, says Glassman. However,
he concluded: "Although spinoffs are no guarantee of success,
they provide structures that are more likely to lead to success."

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