NEW YORK (TheStreet) - Divestitures became a major 2011 strategy as some of America's biggest blue chip stocks like Kraft Foods (KFT), ConocoPhillps (COP), Abbott Laboratories (ABT), Northrop Grumman (NOC), Tyco (TYC) and Marathon Oil (MRO) spun assets to unlock value in their shares.
Shareholders big and small may cheer the flurry of recent spin offs, but in some cases divestitures can be a sugar high that comes at the expense of long term earnings.
Shareholder spins are a quick way to get the full value of businesses that may be weighing on operations, while opening up new avenues for growth. Existing shareholders benefit from owning stakes in divested businesses that oftentimes become far more valuable with brighter prospects as an independent concern. Meanwhile, management accountability to shareholders is easier to track and investors have a much easier time valuing simpler businesses.
The mother of all spinoffs was the Sherman Act breakup of John Rockefeller's Standard Oil in 1911, which made shareholders' stock multiply many times over when the broken up "baby standards" - among them ExxonMobil (XOM) and Chevron (CVX) - turned into some of the most valuable U.S. companies.One hundred years later, vestiges of the Standard Oil empire and others in the energy sector slimmed down after a generation of consolidation in 2011. Along with ConocoPhillips and Marathon Oil, Sunoco (SUN), Forest Oil (FST), Sunoco (SUN), Williams Companies (WMB) and Chesapeake Energy (CHK) all announced 2011 spins. Meanwhile, what was once the $100 billion-plus market cap Tyco International (TYC) empire underwent an epic dismantling in two separate spin deals . Thursday, Murphy Oil (MUR) CEO David Wood said he's considering a spin of the company's downstream businesses, a positive sign for 2012 industry divestitures. Across all sectors, corporate divestitures were a bright spot for deal makers, rising 165% from 2011 and representing 5% of all deals activity, according to Dealogic. In the U.S., divestitures also didn't slow in the second half of the year, as companies spun assets to bolster shares, streamline their strategy and raise capital. The moves may have launched many stocks higher, but it's to be seen whether they will they will generate long-term outperformance. For instance, the Claymore Beacon Spin-Off (CSD) exchange traded fund recently of spun off entities showed mixed results, underperforming Dow Jones Industrial Average and gaining on Standard & Poor's 500 Index. Ascent Capital (ASCMA), Altisource Portfolio Solutions (ASPS), Phillip Morris (PM), Brookfield Infrastructure (BIP), Lorillard (LO) and HSN (HSNI) were the largest holdings in the portfolio as of Jan. 25, according to its Web site. Meanwhile at the parent company, spin moves represent a snapshot in time. Those who own shares prior to a spin gain a stake in any new company, while new investors only get a claim on the earnings prospects of what remains at the parent. For some, it means that spinoffs actually can rid companies of a growth asset, or one that provides balance sheet or cyclical stability. Here's a look at five asset spins that raised capital while jettisoning a needed asset. With the spin dance expected to continue in 2012, a look at past deals shows that some companies may view spinoff decisions with regret. For more on 2012 deal predictions, see Morningstar's 10 top M&A stock investments and 5 big deals that may flop in 2012.
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