By Charley Grant
What does a dopey publicity stunt have to do with mundane
capital allocation challenges for businesses? More than you might
expect.
Volkswagen AG said Tuesday that it would rename its U.S.
operations "Voltswagen" before rescinding the announcement,
explaining it was intended as an early April Fools' Day prank to
highlight its growing electric car business. Har Har.
Volkswagen shares surged 5% on the faux announcement -- a sign
that Wall Street has developed a fascination with electric cars
that conjures memories of dot com-style euphoria.
The stunt by the auto maker, which needs work on both its
messaging and comedy skills, highlights a more substantive dilemma
for company executives. When investors get enthusiastic about a new
theme, some companies face pressure to make a possibly
value-destroying acquisition while others find themselves in the
right niche at the right time. In the latter case, should they pare
their own portfolio by spinning off assets either in full or
partially before they go out of fashion?
The automotive industry has companies that might laugh all the
way to the bank by partially separating divisions. General Motors
Co. has developed a valuable electric car unit, while Google parent
Alphabet Inc. has a self-driving car business. Elsewhere, European
utilities are considering spinning out coal assets to focus more on
green energy sources like wind.
If a particular segment of your business is growing faster than
the overall company, a tax-free spinoff might allow Wall Street to
assign a higher value to the separate parts. That allows
true-believers to hang onto it and cynics who see it as overhyped
to cash out. Even spinoffs that famously flopped, like 3Com Corp.'s
public offering of its Palm computing unit at the very end of the
dot com bubble, gave investors that option. Spinoffs overall do
quite well because a separate entity tends to be more efficient in
its capital investment decisions, according to research from Emilie
Feldman, associate professor of management at the Wharton School of
the University of Pennsylvania.
Over the past 10 years, an index of spinoffs maintained by
S&P Dow Jones Indices had an annual total return of 15.25%
through Wednesday with 11.6% with the S&P 500. Yet U.S. based
firms made nearly three acquisitions for every divestiture in
2019.
"There is an incredible amount of inertia" from management teams
when weighing possible spinoffs, said Dr. Feldman in an
interview.
After all, public companies typically reward executives for
expansion rather than contraction. Spinning out key assets might
also throw a wrench in internal corporate synergies. Then there is
the challenge of persuading stakeholders like employees, customers,
or governments that change is for the better.
Talk to executives who have actually executed a spinoff, and the
real-world basis behind Dr. Feldman's research becomes clear.
"Generally speaking, a spin makes sense when elements of your
business have diverging investment identities," Abbott Laboratories
Chairman Miles White told me.
Mr. White would know: Abbott's 2013 spin off of its
pharmaceuticals unit AbbVie Inc. is among the most successful in
history as measured by market value. At the time, pharmaceuticals
accounted for more than half of the company's total profit. And the
business of drug development is far riskier and more volatile than
other key units at Abbott, like its nutrition or medical device
businesses.
To spot potential spinoff opportunities, Abbott commissions an
annual external analysis on the value of the sum of its businesses.
"Ultimately, you have to be your own activist investor," Mr. White
said.
Evaluating the logic of separating Pfizer Inc.'s animal health
business into its own company was the easy part, Kristin Peck, the
chief executive of the unit, which is called Zoetis Inc., told me
this week. Actually bringing that theoretical value creation to
life was a far heavier lift. While Zoetis was a global operation
with billions in annual sales when it became independent in 2013,
it needed to develop its own critical business infrastructure to
make the transition work.
"It's like being born as an adult," recalled Ms. Peck.
She rattled off the challenges that needed to be overcome. For
starters, recruiting talent to a relative unknown is more difficult
than at a giant company. "You want me to work at Zo-What?" she
said.
Then, the newfound independence means that every contract with
vendors needs to be renegotiated, from FedEx Corp. to United
Airlines Holdings Inc. Key company policies for employees need to
be reconsidered. That means extra investments were required to
build out the new organization -- for example, a new human resource
office and information technology infrastructure. Public company
requirements for several years of retrospective financial
statements needed to be created from scratch since Zoetis was a
small line item on Pfizer's financials.
It also entails tough decisions and negotiations about which
specific assets and liabilities will be assigned to the new company
and which stay with the parent. The new company's structure for
financial and tax reporting needed to be set. All told, Zoetis had
an extensive punch list before going public, deemed Project Banana,
a wordplay reference to the "split," that took months to
complete.
"You only get one chance to do this right," said Ms. Peck.
Integration work continued long after going public. While Zoetis
transitioned to a new enterprise resource planning system, key
company data and analytics were stored on a series of Microsoft
Excel spreadsheets. To compensate, extra staffing in departments
like finance and supply chain management was needed. While that
helped smooth operations during the transition phase, Wall Street
started asking questions about how quickly costs can be removed to
boost profit margins. Balancing those demands is a thin tightrope
for anyone to navigate.
Zoetis today is worth about $75 billion, and early investors
have made more than five times their money. But it wasn't an easy
climb. Ms. Peck wasn't entirely sure that the spinoff would be
successful for two years after it took place. "You have to be sure
it's worth it in the end," she said.
For those who want to float a trial balloon, there's always next
April Fools' Day.
(END) Dow Jones Newswires
April 02, 2021 11:19 ET (15:19 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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