Call it the modern business equivalent of the myth of
Having spent billions of dollars building up its business under Chairman Michael Armstrong,
now plans to pare the business down to four separate companies under the AT&T name. On top of that, the company says its board voted to spin off
Liberty Media Group
. This is not the company's first reorganization. An antitrust settlement with the government in 1984 split the company into the seven regional Baby Bells, and a further voluntary breakup in 1996 created
AT&T is not alone. Recently, Lucent spun off corporate telecommunications company
; business information company
Dun & Bradstreet
divided itself into an operating company and debt ratings agency
spun off its
division in March.
Corporate breakups -- including spinoffs (when a subsidiary is spun off from its parent), equity carve-outs (full or partial public offerings) and the issuing of tracking stocks -- are all the rage on Wall Street. So far this year, 110 deals have been announced, with about 60 completed, making for another record year. In 1999, there were 71 announced spinoffs, with 66 companies following through. The aim of such deals is to "unlock shareholder value," but are they any good for shareholders?
Generally, yes, says Mark Minichello, a principal at
Spin-Off Advisors LLC
, an investment research boutique in Chicago. Minichello says these deals are good news for both parent companies and investors, and the proof is in the market returns.
Investor pressure is driving these breakups, says Jeff Stewart, chairman of the corporate law department at
Arnall Golden Gregory LLP
in Atlanta. Until very recently, the belief was that big companies held a bigger share of the market, and therefore could spread costs and increase profits, he said. But the tide is turning, and the trend today is for nimbler, more focused businesses.
"There are cycles and seasons, and there are periods of consolidation in industries and businesses," Stewart says. Today, the fashion on Wall Street seems to be for valuing the parts of a company more than the whole. The hope is that when taken as a whole, the separate companies will be worth more than they would be under one umbrella, he says.
Through the third quarter of 2000, corporate breakups completed in 1999 have since handily beaten the
return, generating an increase in market value of 106% for spinoffs, 71% for tracking stocks and 68% for carve-outs, according to data from
-- spun off from
Western Wireless Corporation
in May 1999 -- posted the largest spinoff gain, increasing more than 400%.
However, investing in restructuring companies can be tricky, and so it's worth doing some planning before investing in a deal, Minichello says. He believes there are many diamonds in the rough, and investors must do their homework to find them. Among the factors he advises taking into consideration are the dynamics of the company's industry, and the level of competition in that industry.
"For example, the upcoming
tracking stock issued by
is one to avoid," Minichello says. "Growth rates are declining in that industry and margins are falling -- that's a bad sign. WorldCom itself still has potential, but you'll need to think hard about the tracking portion."
As a rule, corporate breakups are designed to unlock the value of core companies and subsidiaries. But without fundamental change, breaking up a bad company only produces more bad companies, says Adrian Slywotzky, vice president at
Mercer Management Consulting
, a corporate strategy firm in Boston.
"When there is a breakup, investors should ask if anyone is fixing the business model -- if not, there won't necessarily be any shareholder value," he explains.
Indeed, breakups can unleash problems for investors, says Stephen Barnes, a portfolio manager at
Barnes Investment Advisory
in Phoenix. Shareholders trade their original shares for a share in each of the new companies; the general idea is that the value of the divided companies will be more than that of the combined entity. But investors should also look at how the company will be financed and examine the pedigree of the new management team, he says.
"Don't just look at the new company's market valuation," Barnes says. "Look at what its market position will be and its opportunity in that market -- will it be an up-and-comer or an also-ran?"
Like AT&T, which will now break up into a consumer telephone business -- represented by a tracking stock and independent stocks representing the company's wireless and broadband cable divisions -- other companies have been busy dividing.
"The notion peddled by investment banks has been that size is the cure for every problem, but it actually makes things worse in most cases," says James Brock, a professor of economics at
in Ohio. "My take is that the virtues of megamergers and gigantism have been oversold, and suddenly people are beginning to say this is invalid, and it doesn't work and the emperor has no clothes."
Indeed, the rash of restructuring is designed to please Wall Street and investors and help companies' ailing stock prices, according to Jeffrey Kagan, a telecom analyst at Kagan Telecom Associates in Atlanta. AT&T's stock has dropped from just below $50 in early May to its recent price of just above $20. Similarly, WorldCom recently warned of weakening business, and says that it plans to restructure as a result. These companies are doing exactly what investors have been asking for, Kagan says. "It's the tail wagging the dog."