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Restarting the Spin Cycle

''Yesterday's merger is tommorow's spin-off.''
Kris Frieswick, CFO Magazine
February 3, 2004

The return of the initial public offering market could unleash a flurry of spin-offs this year, especially among companies that have consolidated during the downturn. Several companies have already announced plans for spin-offs in 2004, including EDS, LSI Logic, and Motorola.

While the total number of spin-offs hit a 12-year low of just 21 in 2003, the tail end of the year yielded some significant deals that seemed to break the dam for 2004, says Mark Minichiello, a principal at Spin-Off Advisors LLC, an independent research firm based in Chicago.

The war, the adverse economy, and the uncertainty of the stock markets kept the deals at bay for most of the year, he says.

Many believed spin-offs would continue to be difficult when the Internal Revenue Service stopped the practice of issuing private letter rulings in August 2003. The suspension will continue for at least a year. But the upswing in the economy trumped concerns over the inability to get an IRS tax ruling, says Minichiello.

One of the most significant deals last quarter was the $575 million IPO spin-off of Overnite Corp. from railroad company Union Pacific. "The Overnite deal sent the message that it was OK to jump back into the pool," says Minichiello. The deal, which was first entertained back in 1998, finally closed on November 5, 2003, and was repriced at $19, up $2 from its original price. Kathryn Blackwell, a spokesperson for Union Pacific, says the time was right for the deal.

There have already been six spin-offs announced for the first half of 2004, including Motorola's semiconductor unit and EDS's PLM Solutions, a software division. LSI Logic Corp., a Milpitas, Calif.-based semiconductor company, has plans to spin off its storage unit early this year.

"A lot of firms have restructured over the past couple of years, and now they can separate the units," says Minichiello. "Yesterday's merger is tommorow's spin-off."




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