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Milwaukee Journal Sentinel Street Smart Stock Analysis column(Milwaukee Journal Sentinel, The (KRT) Via Thomson Dialog NewsEdge) Jan. 9--The acquisition frenzy of the 1990s that forged a host of business marriages has given way to a new trend: corporate break-ups. Sometimes painful and often lucrative, break-ups are the fruit of corporate scandals, stock market meltdowns, lousy stock performance and consternation over sky-high CEO pay. Sophisticated venture capital and hedge fund investors, shareholder activists and even some top executives are preaching the mantra that many times the parts are worth more than the whole. "What seems to be happening recently is spinoffs on steroids," said Christopher J. Grant, managing partner at Grant Koehler & Levin Ltd. in Mequon. The trend doesn't show any sign of slowing, given the competitive global landscape, big infusions of cash flowing into venture and hedge funds, and the rising number of shareholder proposals showing up on company proxy statements. Corporate activism is on the rise. There were 2,051 shareholder proposals in 2005, a 210 percent increase over the 661 proposals offered during all of 2004, according to The Corporate Library, a shareholder watchdog group. In Grant's view, a poster child for the power of a spin-off is Trex Co. (TWP, $28.60). Spun out of Exxon Mobil Corp. in 1999, Trex is a "textbook example of the spinoff of a company held by a giant enterprise," Grant said. Since it became a stand-alone company, Trex has provided its shareholders with a 23.26 percent average annual return vs. 8.96 percent for the Russell 2000 index and a negative 0.21 percent for the Standard & Poor's 500 index during the same period. The success of Trex is not unusual for a spinoff, Grant said. A study by McKinsey & Co. of the performance of 168 spinoffs between 1988 and 1998 said the new companies' average annual return for their first two years was 27 percent vs. 17 percent for the Standard & Poor's 500 index and 14 percent for the Russell 2000 Index. Grant figures spinoffs do that well because big corporations typically distribute capital evenly among divisions, resulting in too much investing in weak areas and not enough in strong ones. Spinoffs of divisions into publicly held companies tend to get the amount of capital they deserve because public markets tend to be more efficient, Grant said. That's why conglomerates typically trade at a discount of 5 percent to 12 percent compared with more focused companies, according to a summer 2001 article in the MIT Sloan Management Review. Grant discussed four big companies that are either looking to break up or are under pressure by outside activists to do so: -- Cendant Corp. (CD, $17.25), New York, is a broad-based conglomerate with real estate, travel, direct marketing and consumer and business services that has franchise brands such as Ramada, Howard Johnson, Avis, Coldwell Banker, Century 21 and Jackson Hewitt. The company has begun to recover from the nightmare of discovering accounting fraud after its 1997 purchase of CUC International, but in the third quarter warned of weakness in ebookers, its United Kingdom online travel business. During that same warning, top executive Henry R. Silverman said the company was considering splitting into four different companies: real estate services, travel, hospitality and vehicle rentals. That's gotten Grant interested. "It looks cheap, but there are a few warts. I haven't made up my mind yet," he said. -- Altria Group Inc. (MO, $75.95), New York, is the parent company of Kraft Foods and Philip Morris, and its brands include Marlboro cigarettes, Oreo cookies, Kraft cheeses, Maxwell House coffee, Nabisco crackers and Philadelphia cream cheese. Grant has owned these shares for years, but still likes them, particularly as the company's tobacco litigation troubles seem to be resolving. A federal lawsuit and another case in Illinois seem to be going in Altria's favor, and Grant said he is optimistic about a third lawsuit in Florida. Altria has said if it gets successful closure on these three major cases, it will split itself into either two (tobacco and Kraft Foods) or three (U.S. tobacco, international tobacco and Kraft) companies. The stock isn't as inexpensive as it was before the litigation scene looked this good, but Grant said he still thinks a split up would add $5 to $10 to Altria's share price. -- Time Warner Inc. (TWX, $17.73), New York, is a media and entertainment company whose businesses include America Online, Time Inc., Time Warner Cable, Home Box Office, Turner Broadcasting System, Warner Bros. Entertainment and DC Comics. Top executive Richard D. Parsons is doing a good job of repairing this company's debt-laden balance sheet and managing the business, but it hasn't produced much stock price appreciation, Grant said. Billionaire financier Carl Icahn thinks shareholders would realize more value from a split of the company. "Here's a story that, unlike Altria, which may be in the seventh inning of breaking up the company, is in the third or fourth inning," Grant said. -- Tyco International Ltd. (TYC, $29.98), Pembroke, Bermuda, makes, services and installs electrical and electronic components, undersea telecommunications systems, fire protection and security systems, flow control valves, health care products and specialty products. Top executive Edward D. Breen has done a wonderful job of cleaning up after former chief executive L. Dennis Kozlowski, who was sentenced to 25 years in prison in September for stealing hundreds of millions of dollars from the company. Tyco's stock traded as high as $35 a share last year but has fallen back some after a disappointing third-quarter earnings report. Breen said during the related conference call that he's frustrated by the gap between the company's current share price and his view of its value, and will do whatever he must to achieve fair value. The market and Grant interpreted that as a signal he'd consider breaking up some or all of the company if necessary. "This company is generating north of $2 a share in free cash flow, you've got a motivated CEO and motivated shareholders who are great investors in Berkshire Hathaway and Legg Mason's Bill Miller. I'm very comfortable with my ownership position," Grant said. The biggest risk he associates with the stock is the possibility the economy will falter, hurting Tyco's business. Grant said he's been buying the stock for new clients and would add to current positions on any weakness. He says Tyco shares could go as high as $35 in the next 12 months. |