Wednesday, February 22, 2006

The urge to diverge

Even as we are in the midst of a M&A boom, we are seeing an increasing urge to divest non-core businesses via spinoffs. These two used to happen in different cycles, but it now seems like both trends are in full play.

Investing in spinoffs, as well as the parents, has been a very succcessful strategy. A good book to read on various ways to profit from this trend is Greenblatt's You too can be a stock market genius, about which I posted earlier.

Among the recent spinoffs that are worth investing in for the long term are Treehouse foods (THS), Acco Brands (ABD), CBS Corp (CBS), Clear Channel Outdoor (CCO), Expedia (EXPE) and Discovery Channel (DISC).

Companies that have announced, but that have not yet executed on their intentions, include Cendant (CD), First Data (FDC) and Tyco (TYC). Cendant and Tyco look attractive by various sum-of-parts valuation methods.

A number of spinoffs end up as takeover targets themselves down the road, usually at a premium following a runup in price.

A few other empires are under tremendous pressure to divest. While Icahn may have given up his efforts to split Time Warner, I expect Time Warner to do so on its own eventually, with America Online and other online properties as an independent entity.

Another oft-mentioned breakup candidate is McGraw Hill (MHP). A spinoff of S&P is desirable, with Dun & Bradstreet's spinoff of Moody's serving as the benchmark.

And a top indicator when the spinoff cycle has run its course - GE spinning off its medical, finance, construction/leasing and real estate businesses. That should unlock some value!


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