SPINOFFS LEAVE PARENTS FEELING LESS THAN ZERO There's been lots of hand-wringing about how overpriced the stock market has become. But I'm here to deliver another point of view. Investors have shown that they think many brick-and-mortar companies are worth less than nothing. Chicago-based Telephone & Data Systems? Worth a negative $60.54 a share. IPC Communications? Worth a negative $129.39. Seagate Technologies? Minus $16.69, for a market value of -$3.7 billion. Don't choke on those Frosted Flakes yet. Check the stock pages, and you'll see that these companies are not trading for negative value. They all closed healthily in plus territory Friday. Still, the market, in its Internet-crazed way, is telling these companies they ain't worth the dirt it would take to bury 'em. Investors are delivering that opinion by the gee-whiz way they're jumping after spinoff stocks. Spinoffs are all the craze these days. Most CEOs pursuing spinoffs are trying to force investors to pay attention to their Internet efforts. They're all moving into cyber-commerce as fast as they can. They see these money-losing, $250-a-share dot-com companies and scratch their bald heads, wondering why their shares are stuck in single digits. That's one of the reasons Skokie-based Bell & Howell last week announced plans to partition the company and spin off a mostly-Internet operation. James P. Roemer, Bell & Howell's chief executive, told analysts there's nothing but upside in the spinoff. "We now have growth opportunities we've never had before," and can seize them better under the new structure, he said. Bell & Howell isn't the only company with sunny spinoff dreams. In 1999, a record 67 companies spun off one unit or another, adding up to $171 billion in stock-market value. It was the fifth consecutive record-setting year. Typically, they spin off about 20 percent of their Internet operations, and retain an 80 percent ownership stake for the parent company. The market falls dizzy in love with the spinoffs. A McKinsey & Co. study last year said stocks of spinoffs climbed 50 percent faster than the Standard & Poor's 500 index. There's an ironic downside to this attention-getting technique. Spinoffs allow the market to evaluate the Internet operations, all right. But they also provide an indirect way for investors to pass judgment on the brick-and-mortar parent too. Consider IPC Communications. The 15 percent of Ixnet that the company spun off is worth $39.50 a share. That gives Ixnet an implied market value of $1.7 billion. But investors value all of IPC--including its 85 percent stake in Ixnet--at only $621 million. Subtract out the value of IPC's Ixnet holdings, and it leaves IPC with a negative implied value: -$129.40 a share. Joe Cornell, president of Chicago-based firm Spin-Off Research, says investors assign a negative valuation to the parent company in about one-third of these deals. Bell & Howell's executives considered this phenomenon before announcing their break-up plans. And company chief financial officer Nils Johanssen in an interview Friday found himself actually underemphasizing the new company's Internet attributes. "I don't think the new company is a pure Internet play, because it really is a click-and-mortar company," he says. Cornell knows it's an ego bruiser for old companies to see that the stock market thinks they're worth less than nothing. But it's not a bad thing altogether, he says. If the market is as efficient as most people think, investors will stop assigning negative valuations to stub companies. Or, if the anomaly continues, the stubs can recapture much of the value when they spin off additional stakes in their Internet offspring. "As a cheap way to get exposure to where these spinoffs are trading now, buy the parent companies," Cornell suggests. They may be worth less than nothing, according to Cornell's fancy math. But when investors see the anomaly, their prices should climb. They've got nowhere else to go. |