Spinoffs Set Stage for Next Wave of Mergers
This year’s breakups may forge next year’s marriages.
Already 166 companies -- from computer maker Hewlett- Packard Co. and EBay Inc. to mining giant BHP Billiton Ltd. -- announced plans this year to spin off business units to shareholders. That’s one for every other day of the year. In the U.S., the number of spinoffs is on pace for a record. Companies also struck $2.3 trillion of mergers and acquisitions worldwide, a seven-year high.
The takeover frenzy could continue into 2015 as this year’s breakup byproducts become more digestible targets. Take EBay and PayPal: Both are considered candidates after their split, for buyers such as Alibaba Group Holding Ltd. and Google Inc. Analysts also say that either of Hewlett-Packard’s divisions may find merger partners. And like EBay, if PepsiCo Inc. were to give into activist investor demands for a breakup after long resisting the idea, both its soda and snacks units could be put in play.
“The use of spinoffs has become increasingly popular as a way to unlock value,” Vikas Seth, head of Europe, the Middle East and Africa and global emerging markets M&A at Credit Suisse Group AG, said in an interview at the bank’s London office. “The demerged entities often are attractive acquisition candidates or consolidation vehicles in their own right.”
This year marked the second anniversary of the Sara Lee Corp. breakup, which later spurred more than $20 billion of acquisitions. The split first made Hillshire Brands Co. and D.E Master Blenders 1753 NV separate publicly traded entities. Then, Hillshire, the sausage business, was acquired this year by Tyson Foods Inc., while D.E Master Blenders was taken private and is now consolidating the coffee industry.
“There’s an intersection between M&A and spinoffs, but the underlying philosophy is portfolio optimization: Is the asset better in your hands, or is it better off in somebody’s else’s hands?” Neil Dhar, a New York-based partner at PricewaterhouseCoopers LLP who leads the U.S. capital markets group, said in a phone interview.
Companies have been looking more closely at their portfolios and considering separation options such as spinoffs, in which a new publicly traded entity is created, to reward shareholders or fund growth, said Chris Ventresca, global co- head of M&A at JPMorgan Chase & Co., based in New York.
“There’s certainly been a pick-up in asset divestitures, with spinoffs being one of the popular options,” Ventresca said in a phone interview. “That’s especially true when there’s not a natural buyer for the asset and capital markets are strong.”
The Standard & Poor’s 500 Index, the benchmark of American equity, closed at a record last month, while the Stoxx Europe 600 Index has recovered much of its losses from the financial crisis.
If spinoffs keep up their recent pace, they’ll exceed last year’s figure and the 196 that were announced in 2012, according to data compiled by Bloomberg. That in turn could “lead to second-order M&A deal flow as the separated companies look to grow by acquisition or become targets,” said Adrian Mee, the London-based head of international M&A at Bank of America Corp.
Technology companies have been leading the way. Hewlett- Packard said Oct. 6 it would spin off its personal computers and printers into a new company called HP Inc. so that the parent can focus on corporate hardware, software and services. The move followed EBay’s Sept. 30 disclosure that it will spin off the PayPal payments unit as a stand-alone company by the end of 2015. Symantec Corp., the $16 billion maker of security software, said Oct. 9 that it’s also splitting into two publicly traded companies.
“You’re starting to see a complete repositioning of the industry,” Sebastian DiGrande, San Francisco-based head of Boston Consulting Group’s technology, media and telecommunications practice for the Americas, said in a phone interview. Some companies will be “stackbuilders” within services, while others will be low-cost providers of equipment and components or specialize in application software.
“Everyone else who’s sort of stuck in the middle will either be broken up, bought or not survive,” DiGrande said.
Shares of Hewlett-Packard climbed 1.2 percent to $32.63 at 9:31 a.m. New York time today. EBay dropped 1.6 percent to $49.80, while Symantec slid 1.7 percent to $22.09.
Outside of the tech industry, BHP Billiton, drugmaker Bayer AG and financial firm Blackstone Group LP are among companies that also have announced spinoffs this year. These moves create smaller, more narrowly focused businesses that are easier for investors -- and potential acquirers -- to value. They may spur additional deals, according to Roger Barron, a London-based partner at law firm Linklaters LLP who advises on mergers and acquisitions.
“As companies focus on their strategic priorities and spin off non-core assets, then other companies may well look to combine those entities with their own,” Barron said in a phone interview.
The slimmed-down Hewlett-Packard Enterprise could buy $56 billion rival EMC Corp. or sell to SAP SE, Oracle Corp. or another industry giant, analysts said this month. The new HP Inc. could also eventually be sold, with logical buyers being Lenovo Group Ltd., Dell Inc. or Acer Inc., according to Shebly Seyrafi, a New York-based analyst at FBN Securities Inc.
As EBay looks to break up, Google could swoop in and buy PayPal to become the leader in online payments, Gene Munster, an analyst at Piper Jaffray Cos., said this month. It’s also conceivable that EBay could attract private-equity firms, according to shareholder River Road Asset Management LLC.
EBay Chief Executive Officer John Donahoe had initially resisted billionaire activist investor Carl Icahn’s suggestion to spin off PayPal. Similarly, PepsiCo CEO Indra Nooyi has been trying to fend off Nelson Peltz’s campaign to split the $139 billion company in half.
With beer behemoth Anheuser-Busch InBev NV seeking ways to grow, some analysts said this month that it should buy PepsiCo to expand into soda. The business that makes Lays potato chips and Quaker oatmeal could go to other buyers, said Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co.
Any of those potential scenarios would extend this year’s merger boom, which has engulfed drugmakers, cable providers, food producers and tobacco companies alike. “lead to second
The animal spirits of M&A are waking up as CEOs and boards are getting a lot more confident,’’ Scott Rostan, founder of Training The Street, a firm that teaches new hires at investment banks how to structure deals, said in a phone interview. It’s a domino effect. So if one company does a deal, it causes more activity in the sector.’’
Any suitors may have to wait a while to bid for a business that’s undergoing a tax-free spinoff. Not only do spinoffs take time, the company also can’t be acquired for up to two years following the separation without triggering tax implications because of rules imposed by the U.S. Internal Revenue Service.
Presumably, companies check for potential bidders before they spin off a unit to shareholders, Patrick Sarch, a partner at Clifford Chance LLP in London, said in a phone interview.
However, it seems to be surprisingly common for spun-off businesses to be acquired not very long after they have achieved independence,” he said.