SPINOFFS MAY BE UNDERVALUED OPPORTUNITIES Mergers and acquisitions isn't the only game in town in this high-flying stock market. Many companies spinning their wheels in search of shareholder value are choosing to spin off their non-core businesses. The result can be an investment opportunity in a field that's largely ignored by Wall Street. In a pure spinoff, a parent company distributes 100 percent of its ownership interest in a subsidiary company to its existing shareholders in the form of a dividend. In a partial spinoff, or carve-out, the parent company sells less than 20 percent of its ownership interest in the subsidiary company to the public. This sale takes the form of an initial public offering, providing capital to the parent and a completely new shareholder base for the public portion of the subsidiary. These undervalued assets often prosper under their own power, going on to post big gains as new stock companies. As a result, 61 spinoffs were announced last year and gears are whirring once again. Hewlett-Packard Co., the computer and printer giant that's been an underachiever in earnings growth, had that in mind when it recently announced plans to spin off its $7.6 billion-a-year test-and-measurement equipment operations. That business, on which the company was founded, will be spun off as an independent company by the first half of next year. H-P hopes to make a public offering of about 15 percent of the shares in the new test-and-measurement company by the end of this year. After that, it will distribute the remaining shares to its shareholders. There are also not-so-thinly-veiled government threats of forced spinoffs, most recently aimed at Microsoft Corp. as it battles in antitrust hearings in Washington. Some analysts privately say they'd actually be more than happy to wind up owning a couple of different Microsoft companies, should a split actually be mandated one day. The unique nature of spinoffs means most major brokerage firms don't bother with them. More important, there isn't enough profit for brokers, because some or all of the spinoff is handled by the parent company as a dividend to existing shareholders. "The tendency is for some of these spin-offs to underperform for a while, then from six months to a couple of years later the dynamics of having a new management with high incentives kicks in," explained Joseph Cornell, president of the Chicago-based Spin-Off Advisors firm, which publishes the monthly Spin-Off Research newsletter. As Wall Street wakes up, Cornell notes, more people start to invest in the stocks and dramatic price appreciation often follows. But there definitely are vagaries in the process. "Most spinoffs aren't the most quality companies, because the larger company is probably getting rid of something that's a problem to it," pointed out Steven Bregman, president of New York-based Horizon Research Group, which publishes The Spin-Off Report. The art is to uncover the spinoff, identify it and be willing to wait a while to be vindicated, Bregman believes. "There's no knee-jerk formula for investing in spinoffs," said Barbara Goodstein, analyst with Rothschild Inc. in New York. Here are two investments worth buying based on present or future spinoff stories, according to the experts: Varian Associates, maker of high-tech systems and components for medical and industrial facilities., is a stock recommended by Cornell and Goodstein. The company changes its name to Varian Medical Systems next month and will distribute one share of Varian Semiconductor Equipment Associates and one share of Varian (formerly the instruments business) for each share of Varian Associates. Attractively priced shares of Jefferies Group are suggested by Bregman and Cornell. This securities brokerage holding company is spinning off its 82 percent stake in Investment Technology Group.
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