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|  | JANUARY 10, 2006
By Emily Thornton Breaking Up Isn't Always the AnswerAs Tyco and Verizon consider spin-offs, a review of last year's six largest diversifications show that unlocking share value isn't a givenWith Corporate America in the midst of a mini-M&A boom (see BW Online, 12/6/05, "M&A: Back with a Vengeance"), breaking up businesses has become a popular way to try to increase shareholder value quickly. That's what Carl Ichan is trying to get Time Warner to do with a spin-off of AOL. And the latest example: Speculation that Tyco International (TYC ) may split into pieces, first reported in The Wall Street Journal. A Tyco spokeswoman declined to comment. There's also talk on the Street that Verizon Communications (VZ ) is considering spinning-off some residential phone lines. Last month, it announced that it may shed its directories business (see BW Online, 12/8/05, "Can Yellow Pages Stay in the Black?"). WHERE'S THE BOOST? "We look at business opportunities as they come along," says Verizon spokesman Eric Rabe. "We might sell some access lines at some point, but not today." Adds Robert A. Kindler, global head of mergers and acquisitions at JPMorgan Chase about the general trend: "A lot of assets are going to shake loose because corporate clarity is what it's all about." Maybe so. But judging from the stocks of major companies that split up in 2005, breaking up may turn out to be harder than companies realize. According to a review conducted for BusinessWeek Online by research outfit Dealogic, the six big companies that announced spin-offs in 2005 and completed them by the first week of 2006 saw no big run-up in shareholder value as a result. The six deals were American Express (AXP ), Dean Foods (DF ), Fortune Brands (FO ), Viacom (VIA ), Liberty Media (L ), and Clear Channel Communications (CCU ). On average, they created the same 3% return as the Standard & Poor's 500-stock index for 2005. MISSING THE POINT. Wall Street's lukewarm response to last year's major spin-offs could mean that CEOs and hedge funds will need to do a lot more to convince investors of the wisdom of break-ups. Take Viacom, which is splitting into two separately traded companies: a "new" Viacom and CBS Corp. The market valuation of both companies is 2%, or $1 billion, less than Viacom's market valuation when it first announced its spin-off last August. Spokespersons for Viacom and CBS both declined to comment for this report. The market has been even harsher on media tycoon John Malone. Ever since his Liberty Media announced last March that it would spin off its 50% stake in cable networks Discovery Communications as well as Ascent Media, a Hollywood movie post-production outfit, the markets have valued both companies at 11%, or $3 billion, less than Liberty Media was as a stand-alone company. What went wrong? For starters, some media companies' spin-offs are flaming out because they are not perceived as solutions to the threat of the Internet and digitalization of their businesses. "If you're in an industry where people perceive fundamental issues, financial engineering alone may not help," says Paul Parker, head of mergers and acquisitions in the Americas at Lehman Bros. BUYOUT TARGETS. Rather than unlocking value, Malone may have inadvertently cast a spotlight on just how complex his jumble of investments in various media companies really is, say some analysts. "The problem is that what was left at Liberty Media was generally unexciting assets," says veteran independent media analyst Richard Greenfield. A spokesperson for Liberty Media could not be reached for comment for this story, and Discovery spokesman John Orr declined to comment. Spin-offs also sometimes leave the smaller companies vulnerable as takeover targets. Almost as soon as the "new" Viacom and CBS began trading, speculation started swirling that either one of them might be snapped up in a buyout, and it hasn't abated. Yes, some recent spin-offs have been home runs. Since Dean Foods announced last January that it would spin-off its specialized foods business and renamed it Treehouse Foods (THS ), the markets have valued both companies as worth 18% more, adding more than $1 billion to the companies' total market capitalization. A Dean Foods spokesperson couldn't be reached, and Treehouse Foods declined to comment. NO QUICK FIX. Some experts also argue that it's way too early to tell if spin-offs announced last year are winners or losers. "Typically it takes a year after a spin-off is completed for it to create value," points out Joe Cornell, head of Chicago-based Spin-Off Advisors. Still, it's clear that markets don't automatically view breakups as a quick fix either. Instead, investors focus on "differentiating between who is performing and who is not," says Boon Sim, head of mergers and acquisitions in the Americas at Credit Suisse First Boston. "If all companies should be specialized, then General Electric (GE ) should be trading at a discount." Instead, GE's stock is trading at 20 times its earnings, vs. slightly less than 19 times on average for S&P 500 companies. That's something big companies like Tyco and Verizon might want to think about in the future.  Thornton is an associate editor for BusinessWeek in New York
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