And the spinning continues. Two more companies announced high-profile divestitures this week, joining a number of others that are seeking to add value by letting go.
Computer-chip maker Intel Corp. on Monday announced plans to imminently launch an independent startup called SpectraWatt Inc. The company, grown out of Intel’s New Business Initiatives group, will specialize in making advanced solar cells, the technology that makes it possible to create energy from light. Intel expects that product line to grow by up to 40 percent in the next few years as the technology’s efficiency improves.
“The formation of SpectraWatt is an important step forward in the renewable energy market,” said Andrew Wilson, SpectraWatt’s new CEO and former general manager in Intel’s New Business Initiatives group.
On Tuesday Kraft Foods revealed the terms of a deal announced last November under which it will merge its Post cereals business with Ralcorp Holdings, a maker of private-label food. The deal, in which Ralcorp Holdings subsidiary Ralcorp Mailman will merge with Kraft subsidiary Cable Holdco, will be tax-free for Kraft shareholders. Cable Holdco will receive 30.4 million shares in exchange for Kraft common stock.
The Kraft and Intel announcements come during a busy month for spin-offs. Notably, media giant Time Warner said it would set free its cable business, Time Warner Cable Inc., in what many observers saw as preparation for an anticipated spin-off of its embattled AOL business.
Still, for the entire year, spin-offs have occurred at a relatively normal pace, according to Kevin Hare, an analyst at Spin-Off Advisors LLC. He says he expects the number to be in the low 30s at large companies in 2008. “Generally a parent company will decide there are no longer synergies,” Hare notes.
In a pure spin-off, a parent company distributes its interests in a subsidiary as a dividend to existing shareholders, creating a second publicly held firm with the same base of shareholders. The opportunity for the parent company to focus on its core business and for the spin-off to be unshackled from parental pressures is intended to ultimately boost the stock prices of both.
Indeed, one reason for the recent batch of spin-offs could be the sagging stock market. (On Wednesday the Dow Jones Industrial Average briefly fell below 12,000 for the first time since mid-March.) J. Randall Woolridge, a finance professor at Penn State University, says that when companies are producing little good news, they often use spin-offs to shake things up. “Look at Kraft and Intel — these stocks haven’t been moving,” he says.
Companies also look to unload slow-growing businesses to boost earnings, appease shareholders, and avoid expending capital, Woolridge says. Thus, they can be viewed as spring cleaning. Often other firms buy the spun-off units after they pare down their operations and show they can grow on their own.