Unlocking value?
In the gin rummy game of managing stock values, discards are almost as frequent as pick-ups. While in general, most industries are tending to oligopoly, companies are constantly defining and refining their positions, sometimes through getting rid of assets that are either not performing or which might have more value on the auction block or in an IPO. But those imagined leaps in value are often illusions.
That's the point of a New York Times article by Andrew Ross Serkin, "Sometimes, Two Is Less Than One", 1/8/3008). He states:
As boards of directors across the nation consider all sorts of breakups, spinoffs, and assorted other ways to "unlock" shareholder value, here's something your investment banker is likely to gloss over, and investors often do not understand: after you say you plan to break up your company, your stock is not likely to go up in the short term; in fact it may go down.
Examples abound. Cendant split up last year into four different companies. The stock value of the pieces is now 13% lower than that of the united company. Viacom's stocks dropped 20% when its split up was announced. When conglomerate Tyco announced it would split into four business units (this in 2001, before the financial scandal came to light), its stock headed drastically down. The bankrupt entity recently announced essentially the same strategy.
According to Serkin's analysis the cause for this drop is several:
- Institutional investors get out because they are interested in big-cap investments, not a bunch of small caps.
- Small investors see a redefined company and lose their original reason for investing in the company.
I think that there's another reason. Companies that are growing (even when profits are down) look like they are a deal away from getting the right hand together. A move toward getting smaller indicates that the strategy of acquiring and expansion has been, to some extent, a failure. No matter how rational the split may be, it is concession that somewhat has screwed up. It reminds investors that the management (present or past) is fallible, that business condition are rougher in the long term than management has admitted in the past, that real growth is not inevitable.
Serkin notes that the majority of companies recover after an initial dip and that shareholder value does recover in time, in most cases. As he notes, splitting up "may be the right move for some companies, of course, but more often than not it appears to be a simplistic solution to a complex problem-and it doesn't always work, especially if the goal is to satisfy the fast-money hedge fund crowd."
