The Corporation: RESTRUCTURINGS
WHY D&B IS GLUED TO THE TICKER
Wall Street greets a breakup plan with deafening silence
His beeper keeps going off. Dun & Bradstreet Chairman Robert E. Weissman is sitting in his office trying to explain his spin-off strategy, but he keeps getting interrupted. The beeper is signaling yet another story moving over the wires on the company's financial results for 1995.
The news isn't exactly wonderful. Net income was nearly halved, to $1.89 per share, because of a $448 million writeoff for costs associated with a plan to break up the information-services giant. Still, Weissman could also report that revenues grew 10.6%, to $5.4 billion, the first double-digit rise since 1990.
For Weissman, however, even the good news about revenue growth only underlines an unusual problem he believes confronts Dun & Bradstreet Corp.: Its shareholders, who value the company for its high-dividend payouts, are preventing him from more aggressively carrying out a strategy to sustain that kind of healthy top-line growth. His solution: to bust the 155-year-old corporation into three publicly traded companies.
So far, market reaction has been little more than a collective yawn, and some critics say Weissman's novel rationale for the spin-off makes little sense. Unlike AT&T, which saw its stock leap 11% the day of its spin-off announcement, D&B shares continue to languish. As the overall market has reached record highs, D&B stock has risen just 4%, to $66 a share, since Weissman unveiled his strategy on Jan. 9.
The reason: Investors now realize the spin-off disguises a huge cut in the dividend, to about $1.55 from $2.64 a share, and that D&B's market research unit, A.C. Nielsen, is far more beleaguered than previously thought. Locked into a price-cutting war with a tough rival, Nielsen posted only $6 million in net income on $1.3 billion in revenues last year. "Suddenly, people realized how badly it was doing," says Edward J. Atorino, an Oppenheimer & Co. analyst. "Some are skeptical it will show dramatic improvement anytime soon."
Undaunted, Weissman has chosen what is becoming the strategy du jour. Breakups are being adopted by a growing number of corporate giants, from AT&T and ITT to Hanson and 3M. Already this year, more than $73 billion in spin-off transactions are pending, up from a record $47.9 billion in 1995, according to J.P. Morgan Securities Inc.
Studies show that the stock market rewards a parent company's decision to do a spin-off. J.P. Morgan asserts, for example, that on average a parent company's stock will outperform the market by 6% by the date of the actual breakup. Spin-offs then outperform the market by an average of more than 20% in the first 18 months of independence.
Weissman is hoping his strategy will work the same kind of magic. Many of today's spin-offs are the result of failed strategies and the market's desire for "pure plays." What makes D&B's move different--at least as it is explained by Weissman--is the motivation behind the breakup: Essentially, he wants to attract a different breed of shareholder. The $448 million price tag on this strategy isn't cheap, however, and some argue that its primary purpose could be accomplished by better communicating the new growth strategy and following through on it--all without a costly breakup. "On the surface, this makes no sense," says Thomas Z. Lys, a Northwestern University business professor. "The managers should do what they believe is right and let the shareholders reshuffle themselves."
ANEMIC GROWTH. In one sense, Weissman's strategy is born of frustration. He has presided over a highly profitable company saddled with an anemic growth record and a stock that has missed one of the biggest bull markets of all time. Since early 1994, when Weissman became CEO, D&B stock has eked out a gain of only 5% at a time when the Standard & Poor's 500-stock index rose more than 36%. Revenue growth averaged just 1.7% a year since 1990. Yet the company's return on equity has averaged 34.2% in the past five years, nearly four times the profitability of Dow Jones & Co. and more than twice that of The McGraw-Hill Companies, publisher of BUSINESS WEEK.
What to do? Weissman tried to carve out a new image for the not-so-glamorous company based in Wilton, Conn. His first annual report shocked some D&B old-timers because it overflowed with quotations from trendy management gurus as well as reproductions of abstract art. More important, Weissman, 55, who joined D&B in 1979, began to focus on revenue growth.
D&B's investors were none too pleased. When Weissman lowered Wall Street's earnings estimates early last year so he could invest an extra $75 million in new-product development and international expansion, the decision cost the company hundreds of millions in market capitalization. After Weissman told a key investor that he would pursue revenue growth even if it meant cutting D&B's dividend, the stock dropped 12%. "Over a billion dollars in market value disappeared within a week and a half," says Weissman. "That was the kind of sensitivity our shareholders had over it. We needed to deal with it."
Ultimately, Weissman concluded that his shareholders failed to match up with the kinds of diverse businesses that now comprise the company. They think of D&B as a "preferred stock with modest growth potential," he says. He maintains that those high-dividend expectations constrained D&B from making larger investments in businesses with high-growth potential as well as from making defensive investments to shore up units under attack from rivals.
With investment banker Goldman, Sachs & Co., Weissman pondered alternatives, from selling D&B to making a sizable acquisition himself--one big enough to transform the entire company. No buyer was willing to offer a hefty premium for D&B. Gobbling up another company, he figured, wasn't the answer, either. "To the degree you made growth investors happy, they also would say it doesn't look like as much of a growth vehicle as we would like," he says.
Breaking up the company into three parts with different capital needs and growth prospects, Weissman thinks, will make it easier for executives to manage operations and for shareholders to invest. Those who like D&B for its stability can keep their shares in the $2 billion D&B spin-off, which includes Moody's. Investors who seek the potential for high growth might find $1.4 billion Cognizant Corp. a worthwhile bet. To be headed by Weissman, Cognizant includes health-care market research company IMS International and broadcast ratings firm Nielsen Media Research. Prospectors looking for a potential turnaround might go for troubled A.C. Nielsen.
TAKEOVER BAIT? Although investors haven't registered their approval in the market, some shareholders like the breakup. They think the move makes D&B takeover bait. "There is a good likelihood now that one or more of the newly created businesses could be acquired," says Mark A. Boyar, who manages a $100 million investment portfolio with a stake in D&B. Boyar maintains the breakup value is over $80 a share.
Maybe--but not just yet. Weissman says he is not disappointed that D&B's stock hasn't yet taken off. On the day the board approved the spin-off plan, he told his directors he wasn't sure whether the stock would go up or down. "We believed that if we do this, the value of the company will eventually grow," he insists, just after his beeper sounds a third time. Weissman may have to wait a long time for the beep announcing good news.BY JOHN A. BYRNE, IN WILTON, CONN.Return to top