A Bumpier Road For Equity Carve-Outs Although Some Split-Off Firms Starred, Average Price Gains Narrowed in 1997

The average aftermarket gain for equity carve-outs contracted for the second straight year in 1997. At year-end, the average price of the 46 restructuring IPOs floated during 1997 had appreciated by 14% from their offering prices. The average increase was down from 18.9% for 54 issues in 1996 and 23.3% for the 34 issues that hit the public trading markets in 1995. The average upturn for restructuring IPOs sharply lagged the performance in the general stock market. The Dow Jones Industrial Average scored a one-year gain of 22.6% while the far broader S&P 500 surged 31% from start to finish in 1997. All IPOs averaged a 19% increase from their offering prices to the closing prices on Dec. 31, 1997. Fifteen carve-outs suffered declines from their offering prices, some huge. Twenty-seven issues posted gains from their initial prices and four were trading at the same level when the trading year came to an end. The spotty performance was a function of everything from bad timing to dubious conception. Some of the carve-outs were launched amid the market volatility in the latter stages of 1997 and couldn’t stand up to the headwinds. Several issues that were floated earlier in the year and had been doing well gave up all or much of their gains during the late-year turmoil. But the bloc also suffered from its eclectic mixture which ran from star-quality market leaders to a strong dash of companies that were basically in or not much beyond their start-up stages. In between were a number of companies manifesting concepts that either didn’t fly with investors or were tepidly received. Much of the rough stuff was compounded in the 22 carve-outs sponsored by publicly owned U.S. companies as restructuring plays to provide a measure of independence and public market exposure for subsidiaries. Eleven were down from offering prices by year-end, only 10 rose, and the average gain for the segment was less than 0.2% The steepest decline suffered by a carve-out was within that group. It was DTM Corp., a producer of laser systems sold by B.F. Goodrich Co., which plunged 82.8% from its offering price. CarMax Group, the automobile dealership arm of Circuit City Stores Inc., dropped 55%. As a rule, “name” companies returning to public ownership through carve-outs fared well. The two leading car rental companies rode to strong gains. Hertz Corp., floated by Ford Motor Co., rang up a 67.7% gain, and Avis Rent A Car Inc., divested by HFS Inc., did even better, with a run-up of 87.9%. A third major car rental firm, Dollar Thrifty Automotive Group Inc., which was divested by Chrysler Corp., was unchanged from its offering price at year-end. Other well-known firms that scored when given a new shot at public ownership included General Cable Corp., up 72.3%; Santa Fe International Corp., up 43%; CIT Financial Group Inc., up 19.4%; and General Cigar Holdings Inc., up 18.4%. But Howmet International Corp. was unchanged at year-end and Chicago Bridge & Iron Co. dipped 9.7%. Divestitures Star IPOs used by parent companies to divest businesses produced the best average gain for carve-out subsets, with an average run-up of 40.4%. Three of the six divestiture IPOs, with Avis in the lead, managed large price increases. The eight IPOs floated by privately owned and mutual companies were not far behind, with an average gain of 37.8%. That group included AmerUS Life Holdings Inc., a life insurer split off by American Mutual Holding Co., which posted the biggest run-up of any firm in the carve-out group, or 123.5%, and Nationwide Financial Services Inc., savings and retirement plan unit of the Nationwide insurance group, which jumped 53.7%. Offerings by foreign companies, including General Cable and Santa Fe International, notched an average gain of 14.2%, and joint-venture offerings, of companies with two or more major owners, averaged an 8.5% pickup. As 1998 began, the entire IPO market was clouded because of general stock market volatility and inconsistent performance of many new issues sold during the year, among other factors. How this plays out will be a major factor in carve-out volume for the remainder of the year as restructuring or diversified companies determine whether it is worth their while to launch their subsidiaries in the public market. The pressure to restructure remains strong but there are alternate structures to carry out makeover plans and the question is which formats will be selected. Nonetheless, there was a fair-sized backlog of IPO carve-outs at press time, with Waddell & Reed Financial Services, mutual fund arm of Torchmark Corp., among the better- known firms waiting to reach the public stage. Roll-Ups: Roll-Up IPOs Rebound From Setback Controversial though they may be, roll-up IPOs, which combine mergers with public offerings to create good-sized companies, proliferated in 1997 to become a significant factor in the new-issues market. There were at least 18 roll-up IPOs and they scored an average gain of 23.2% between their offering price and year-end trading levels. The roll-up IPO bundles a number of companies – there were anywhere from two to 14 involved in 1997 transactions – with the merger of constituent firms effective with the actual public offering. If the issue is not priced, the companies don’t come together and if the filing is scrubbed, the whole deal unravels. The vehicle has been used principally as a consolidation play in fragmented industries, with service and distribution sectors predominating to date. Prior to 1997, roll-up IPOs had trickled out at the rate of a few a year and were criticized by many dealmakers as a short-term fad. There were widespread predictions, moreover, that the Securities and Exchange Commission had delivered a coup de grace in 1996 when it denied automatic pooling-of-interest accounting for roll-ups, a primary appeal of most of the earlier deals. Obviously, the rush of 1997 offerings nullified conventional wisdom. Twelve of the 18 roll-ups appreciated from their IPO levels to year-end, five were down, and one showed no change. Vestcomm International Inc., a computer output and document management firm, forged the best gain – 74.1% – with Travel Services International Inc., travel and reservation services company, the runner-up at 69.6%. Spin-Offs: Using the Spin-Off To Reverse Course Spin-offs remained a popular flavor among restructurings in 1997. Volume for the tax-free disposition alternative continued at a high level and the versatile format found its way into a wide variety of strategic applications. Among the most prominent uses for the spin-off was the reversal of diversification strategies or the unwinding of so-called balanced companies that were built over long periods of time. Tradition was shattered at several levels, including points along the value chain. PepsiCo Inc. abandoned a forward integration approach by spinning off its three restaurant chains under the Tricon Global Restaurants banner. Rockwell International Corp. cut loose its onetime core auto parts business under the name of Meritor Automotive to concentrate on higher technology while CPC International Inc. placed its bets on branded food products by snipping ties with its founding corn wet milling operation which took its independence under the name Corn Products International. Similarly, Monsanto Co. moved full-time into biotechnology by spinning off its old-line chemical operations as Solutia Inc. There was one three-way breakup during the year – executed by General Instrument Corp., which transformed itself into General Semiconductor. Its offspring were CommScope in coaxial cable wire and NextLevel Systems in cable TV equipment. NextLevel stayed with that name only a short time and then revived the former parent’s old General Instrument name. Pick-Offs: Picking Off IPO Candidates Acquirers plucked eight companies off the IPO registration rolls during 1997: Amerisafe Inc., workers compensation insurance, acquired by Welsh Carson Anderson & Stowe for an undisclosed price. Blazer Energy Corp., (carve-out by Ashland Inc.) oil and gas, acquired by Statoil A/B, $566 million. Champion Mortgage Holdings, second mortgages, acquired by KeyCorp., $200 million. Eller Media Corp., outdoor advertising, acquired by Clear Channel Communications, $1.15 billion. Fiberite Inc. (reverse LBO), composite materials, acquired by Cytec Industries Inc., $344 million. General Medical Corp. (reverse LBO), health care products distribution, acquired by McKesson Corp., $775 million. Livingston Enterprises, remote-access networking services, acquired by Lucent Technologies Inc., $650 million. Mendik Co., office building owner, acquired by Vornado Realty Trust, $656 million. Publicly traded carve-outs became key targets during 1997 with at least seven acquired in high-priced transactions, five in the megadeal class: American States Financial Corp. (Lincoln National Corp.), insurance, acquired by Safeco Corp., $3.13 billion. Destec Energy Inc. (Dow Chemical Corp.), electric power, oil and gas, acquired by NGC Corp., $1.22 billion. Monterey Resources Inc. (Santa Fe Pacific Corp.), oil and gas, acquired by Texaco Inc., $1.45 billion. Palmer Wireless Inc. (Palmer Communications), cellular telephone service, acquired by Price Communications Corp., $870.4 million. Paul Revere Corp. (Textron Inc.), insurance, acquired by Provident Cos., $1.17 billion. Santa Fe Pacific Gold Corp. (Santa Fe Pacific Corp.), gold mining, acquired by Newmont Mining Corp., $2.51 billion. USX-Delhi Group (USX Corp.), pipelines, acquired by Koch Industries Inc., $762 million. Three equity carve-outs were reacquired by their parent companies: Acordia Inc., insurance, 33.2% public interest purchased by Anthem Inc., $193.2 million in cash. Enron Global Power & Pipelines, natural gas pipeline, 48% public interest purchased by Enron Corp., $428 million in stock. Guaranty National Corp., insurance, 22.7% public interest purchased by Orion Capital Corp., $117.2 million in cash. Stock Buybacks: Buyback Allocations Reach a Record Even though the stock market remained at a very high level, public companies set aside a record sum in 1997 to support their prices through share repurchases. Total allocations reached $179.4 billion, an increase of 1.8% from the previous peak level of $176.2 billion in 1996. The number of shares earmarked for repurchases, however, declined by 14.8% to 1.26 billion from the record 1.48 billion the year before. The massive appropriations for stock buybacks suggested that major companies were generating huge amounts of excess cash beyond their investment needs and were, therefore, sharing their cash reserves with stockholders. In recent years, buybacks have joined with dividend increases as a key mechanism for steering cash to shareholders. IPO Carve-Outs by U.S. Public Companies1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketATL Products Inc. 3/7 11 11 – NasdaqMagnetic tape librariesParent: Odetics Inc.Chicago Bridge & Iron Co. NV 3/26 18 16-1/4 9.7% NYSESteel tanks and structuresParent: PRAXAIR Inc.Circuit City Stores Inc. – CarMax Group 2/4 20 9 55.0 NYSEAutomobile dealerParent: Circuit City Stores Inc.Commodore Separation 4/30 5 2-1/4 55.0 NasdaqTechnologies Inc.Mineral separation technologyParent: Commodore Environmental Services Inc.DTM Corp. 5/2 8 1-3/4 82.8 NasdaqLaser systemsParent: B.F. Goodrich Co.Electric Lightwave Inc. 11/24 16 14-7/8 7.0 NasdaqTelecommunicationsParent: Citizens Utilities Co. Franchise Mortgage Acceptance Co. 11/19 18 18-3/8 2.1 NasdaqBusiness lending, equipment leasingParent: Imperial Credit Industries Inc.General Cigar Holdings Inc. 2/28 18 21-5/16 18.4 NYSECigarsParent: Culbro Corp.Hartford Life Inc. 5/22 28-1/4 45-5/16 60.4 NYSELife insuranceParent: Hartford Financial Services Group Inc.Hertz Corp. 4/25 24 40-1/4 67.7 NYSECar rentalParent: Ford Motor Co.JLK Direct Distribution Inc. 6/27 20 28 40.0 NYSEMetalworking materialsParent: Kennametal Inc.Logility Inc. 10/6 14-1/2 9-3/4 -32.8 NasdaqValue chain softwareParent: American Software Inc.Metrika Systems Corp. 6/20 15-1/2 15-1/4 – 1.6 AMEXScientific measurement equipmentParent: Thermo Instrument Systems Inc.NACT Telecommunications Inc. 2/26 10 17-3/4 77.5 NasdaqTelecommunications switching platformsParent: GST Telecommunications Inc.NewCom Inc. 9/15 9-1/2 14-3/4 55.3 NasdaqComputer communications and multimedia equipmentParent: Auer Systems Inc.Nexar Technologies Inc. 4/8 9 4-3/4 -47.2 NasdaqPersonal computersParent: Palomar Medical Technologies Inc.NovaCare Employee Services Inc. 11/11 9 8 -11.1 NasdaqHealth care personnel servicesParent: NovaCare Inc.<\TBL> IPO Carve-Outs by U.S. Public Companies (continued) 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketPriority Health Care 10/24 14-1/2 15-1/8 4.3% NasdaqHealth care products distributionParent: Bindley Western Industries Inc.Progenitor Inc. 8/7 7 2-3/8 -66.1 NasdaqGenetic developmentParent: Interneuron Pharmaceuticals Inc.Star Buffet Inc. 9/24 12 11-1/2 -4.2 NasdaqBuffet restaurantsParent: CKE Restaurants Inc.Thermedics Detection Inc. 2/21 11-1/2 16-3/8 42.4 AMEXDetection and measurement systemsParent: Thermedics Inc.Thermo Vision Inc. 12/9 7-1/2 8-1/8 8.3 AMEX<\TBL> Divestiture IPOs* 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketAvis Rent A Car Inc. 9/24 17 31-15/16 87.9% NYSECar rentalSeller: HFS Inc.Dollar Thrifty Automotive Group Inc. 12/17 20-1/2 20-1/2 – NYSECar rentalSeller: Chrysler Corp.Eagle Geophysical Inc. 8/6 17 13 -23.5 NasdaqSeismic data gatheringSeller: Seitel Inc.Healthcare Recoveries Inc. 5/22 14 22-1/4 58.9 NasdaqInsurance recovery servicesSeller: Medaphis Inc.Long Beach Financial Co. 4/29 6-1/2 11-5/8 78.8 NasdaqSub-prime mortgage loansSeller: Long Beach Mortgage Co.<\TBL> Foreign Company Carve-Outs 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketAxiom Inc. 7/8 12 4 -66.7% NasdaqTelecommunications billing softwareParent: Securicor Communications Ltd. (U.K.)CIT Group Inc. 11/13 27 32-1/4 19.4 NYSECommercial financeParent: Dai-Ichi Kangyo Bank (Japan)General Cable Corp. 5/15 21 36-3/16 72.3 NYSEWire and cableParent: Wassall PLC (U.K.)OYO Geospace Corp. 11/21 14 18-7/8 34.8 NasdaqSeismic instrumentsParent: OYO Corp. (Japan)Santa Fe International Corp. 6/9 28-1/2 40-3/4 43.0 NYSEOil and gas drillingParent: Kuwait Petroleum (Kuwait)Spectra-Physics Laser Inc. 12/12 11 12-1/2 13.6 NasdaqLaser equipmentParent: Spectra-Physics AB (Sweden)Tropical Sportswear International Corp. 10/29 12 10 -16.7 NasdaqMen’s apparel<\TBL> Private and Mutual Company Carve-Outs 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketAmerUS Life Holdings Inc. 2/28 16-1/2 36-7/8 123.5% NasdaqLife insuranceParent: American Mutual Holding Co.Brookdale Living Communities Inc. 5/1 11-1/2 17-1/4 50.0 NasdaqRetirement centersParent: Prime Group Inc.Conning Corp. 12/16 13-1/2 16-1/4 24.1 NasdaqAsset managementParent: General American Life Insurance Co.ITC^DeltaCom Inc. 10/23 16-1/2 16-1/2 – NasdaqTelecommunicationsParent: ITC HoldingInspire Insurance Solutions Inc. 8/21 12 20-7/8 74.0 NasdaqInsurance policy and claims processingParent: Miller MutualMetromedia Fiber Network Inc. 10/28 16 16-5/8 3.9 NasdaqFiber optic communicationsParent: Metromedia Co.Nationwide Financial Services Inc. 3/5 23-1/2 36-1/8 53.7 NYSESavings and retirement plansParent: Nationwide Insurance Enterprises Network Solutions Inc. 9/27 18 13-1/8 -27.1 NasdaqInternet name registrationsParent: Science Applications International<\TBL> Joint Venture IPOs 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketGalileo International Inc. 7/25 24-1/2 27-5/8 12.8% NYSEAirline, hotel, car rental reservationsParents: United Air Lines; KLM; British Airways; U.S. Airways; Sair Group Howmet International Corp. 11/26 15 15 – NYSEAerospace componentsParents: Carlyle Group LP; Thiokol Corp.Pegasus Systems Inc. 8/7 13 14-7/8 14.4 NasdaqTransaction processing for hotelsParents: Best Western Hotels; HFS Inc.; Hilton Hotels; Hyatt Corp.; La Quinta Inns Inc.; Marriott Corp.; ITT SheratonUnifab International Inc. 9/18 18 19-1/4 6.9 NasdaqOil drilling and production equipmentParents: McDermott International Inc. and Universal Partners Inc.<\TBL> Roll-Up IPOs 1997 Offering Offering Price % TradingCompany Date Price 12/31/97 Change MarketBroughton Foods Co. 12/9 15 16-3/4 11.7% NasdaqMilk and dairy productsOne companyCarey International Inc. 5/27 10-1/2 15-1/8 44.0 NasdaqLimousine servicesOne companyComfort Systems USA Inc. 6/27 13 19-3/4 51.9 NYSEHeating, ventilating, air conditioning services12 companiesGroup 1 Automotive Inc. 10/30 12 9-1/6 -24.5 NYSEAuto dealers4 companiesGroup Maintenance America Corp. 1/6 14 16-13/16 20.1 NYSEHeating, ventilating, air conditioning services13 companiesHome USA Inc. 11/21 8 8-1/4 3.1 NYSEManufactured home retailers9 companiesImageMax Inc. 12/4 12 10-1/8 -15.6 NasdaqDocument management services14 companiesIndustrial Distribution Group Inc. 9/24 17 15-11/16 -7.6 NYSEIndustrial products distribution9 companiesInnovative Valve Technologies Inc. 10/23 13 20-1/4 55.8 NasdaqValve maintenance7 companiesMetals USA Inc. 7/10 10 15-1/4 52.5 NYSEMetals processing and service centers8 companiesOrthAlliance Inc. 8/21 12 9-1/8 -24.0 NasdaqOrthodontic practices2 companiesPalEx Inc. 3/20 7-1/2 11-7/8 58.3 NasdaqPallets3 companiesPrecision Auto Care Inc. 11/6 9 9 – NasdaqAutomobile maintenance8 companiesSonic Automotive Inc. 11/10 12 9-5/8 -19.7 NYSEAuto dealers6 companiesTravel Services International Inc. 7/22 14 23-3/4 69.6 NasdaqTravel and reservation services5 companiesUSA Floral Products Inc. 10/10 13 15-3/4 21.2 NasdaqFloral products distribution8 companiesVestcom International Inc. 7/30 13 22-3/8 74.1 NasdaqComputer output and document management services7 companiesWaterlink Inc. 6/24 11 16-1/2 50.0 NYSEWater and sewage treatment equipment2 companies<\TBL> Log of Major Spin-Offs 1997 Share Former Exchange TradingSpun-Off Company Business Parent Ratio MarketBEI Technologies Inc. Sensors and systems BEI Electronics Inc.* 1 for 1 NasdaqBJ’s Wholesale Club Inc. Food warehouse stores Waban Inc. 1 for 1 NYSEBig 4 Ranch Real estate Citadel Holding Corp. 1 for 1 NasdaqCable Michigan Inc. Cable TV C-Tec Corp.** 1 for 4 NasdaqChoice Hotels Franchising Inc. Hotel franchising Choice Hotels 1 for 1 NYSE International Inc.ChoicePoint Inc. Insurance services Equifax Inc. 1 for 10 NYSECommScope Inc. Coaxial cable wires General Instrument Corp.*** 1 for 3 NYSECorn Products International Inc. Corn wet milling CPC International Inc.u 1 for 4 NYSECrescendo Pharmaceuticals Corp. Pharmaceuticals ALZA Corp. 1 for 20 NasdaqCrescent Operating Inc. Construction equipment Crescent Real sales and finance; mental Estate 1 for 10 Nasdaq health facilities Equities Co.Energy Group PLC Coal Hanson PLC 1 for 8 NYSEFreeport-McMoRan Sulfur Inc. Sulfur mining Freeport-McMoRan 1 for 10 NYSE Resource Partners LPGallaher Group PLC Tobacco products American Brands Inc.uu 1 ADS for 1 NYSEGetty Petroleum Marketing Inc. Gasoline stations Getty Petroleum Corp.uuu 1 for 1 NYSEGriffin Land & Nurseries Inc. Nurseries Culbro Corp. 1 for 1 NasdaqGulfmark Offshore Inc. Marine services Gulfmark International 2 for 1 Nasdaq Inc. Investors Bancorp Banking Bando McGlocklin 1 for 4 Nasdaq Capital Corp.LNR Property Inc. Commercial real estate Lennar Corp. 1 for 1 NYSEMarcam Solutions Inc. Computer services Marcam Corp.D 1 for 2 NasdaqMeritor Automotive Inc. Auto components Rockwell International 1 for 3 NYSE Corp.NextLevel Systems Inc. Digital phone equipment General Instrument Corp. 1 for 1 NYSEPriceSmart Inc. Overseas retailing Price Enterprises Inc. 1 for 4 NasdaqRCN Corp. Telecommunications C-Tec Corp.** 1 for 1 Nasdaq servicesSLH Corp. Real estate, energy Seafield Capital Corp.DD 1 for 4 NasdaqSolutia Inc Chemicals Monsanto Co. 1 for 5 NYSETricon Global Restaurants Inc. Restaurants PepsiCo Inc. 1 for 10 NYSEUNOVA Inc. Industrial computing and Western Atlas Inc. 1 for 1 NYSE machining systemsUnique Casual Restaurants Inc. Restaurants Daka International Inc.DDD 1 for 1 NasdaqVital Images Inc. Medical imaging equipment Bio-Vascular Inc. 1 for 2 NasdaqWHG Resorts & Casinos Inc. Resorts, gambling casinos WMS Industries Inc. 1 for 4 NYSETargeted StockGeorgia Pacific Corp. Timber lands Georgia Pacific Corp. 1 for 1 NYSE(Timber Group)* Name changed to BEI Medical Systems Co. ** Name changed to Commonwealth Telephone***Name changed to General Semiconductor Inc.* Name changed to BestFoods Inc.** Name changed to Fortune Brands Inc.***Name changed to Getty Realty Corp.* Name changed to MAPICS Inc.** Name changed to Lab Holdings Inc.***Spin-off in conjunction with sale of food service business to Compass PLC<\TBL> Major Self-Tenders1997 No. of Shares ValueCompany (mil) ($ mil)ITT Corp. 30.0 $2,100.0Pioneer Hi-Bred 16.4 1,517.0 International Inc.WMX Technologies 30.0 900.0 Inc.Browning-Ferris 15.0 585.0 Industries Inc.IPALCO Enterprises 12.0 408.0 Inc.Ethyl Corp. 35.0 333.7Briggs & Stratton Corp. 3.6 183.1T/SF Communications 2.7 134.1 Corp.Insilco Corp. 2.6 110.0Titan Wheel 3.8 56.5 International Inc.Source: SDC Merger & Corporate Transactions Database<\TBL> Selected Major Stock Buyback Allocations 1997Company Shares/ValueAmerican Stores Co. 12.2 million sharesBankAmerica Corp. $3 billionCalEnergy Co. 20.2 million sharesGeneral Electric Co. $4 billionGeneral Motors Corp. 43.7 million sharesHershey Foods Corp. 9.9 million sharesIntel Corp. $4.2 billionIBM Corp. $3.5 billionMerck & Co. $5 billionMorton International Inc. 10 million sharesPNC Bank Corp. 15 million sharesPhilip Morris Cos. $8 billionSara Lee Corp. $3 billionServiceMaster 27 million sharesWestinghouse Air Brake Corp. 10 million sharesSource: SDC Merger & Corporate Transactions Database<\TBL> Stock Buyback Allocations1993 to 1997 No. of Value Shares Year ($ bil) (bil)1993 $38.4 0.6061994 73.8 1.011995 99.5 1.111996 176.2 1.481997 179.4 1.26Source: SDC Merger & Corporate Transactions Database<\TBL>