Friendly Corporate Divorces
Corporate mergers and acquisitions often produce more publicity than profits. Companies moving in the opposite direction through spin-offs or split-ups can be more profitable for shareholders. Whether the failures or successes of these maneuvers have parallels to human marriages and divorces is beyond the scope of this column.
I sometimes think that an excessive supply of bright young people eager to use their new MBA degrees may lie behind the dismal record of many corporate buys. Ford, for example, originated the Ford Taurus in 1985 and began to sell millions of this milestone design. Four years later, sales began to taper off under the competitive pressure of new Japanese midsize sedans.
Did Ford invest billions in a new design to continue its sales momentum? Regrettably, no. It spent a mere $100 million for a facelift on the Taurus but $2.5 billion to buy Jaguar. (Having by then owned three Jaguars, I thought this investment was unlikely to succeed.) Still stuck in the same gears, it then spent almost $3 billion to buy Land Rover. Ford sold both companies in 2008 to India’s Tata Motors for $2.3 billion, losing billions on the pair.
Business analysts estimate that about two-thirds of mergers and acquisitions fail. In contrast, I believe that spin-offs or split-ups have a higher success rate, possibly due to the energies unleashed by new management teams. A familiar example is the 1982 divestiture by AT&T of the seven “Baby Bells.”
Last month, I recommended Abbott Labs (ABT-$59) in anticipation of its planned division into two companies: its traditional medical supplies business and its pharmaceutical division. It is up three points since then but I am still adding to positions as Abbott represents an unusual combination of stability and growth together with the prospective catalyst of two companies trading independently. Abbott pays an attractive $.51 quarterly dividend and its stock goes “ex-dividend” on April 11.
ConocoPhillips (COP-$77) is my newest split-up recommendation. The company intends to divide its “downstream” operations of refining and marketing from its “upstream” operations of oil and gas exploration and production. It plans to complete this by the end of the second quarter.
As with Abbott, market history suggests that the sum of the two parts will exceed the parent’s value after the new companies have a few weeks to make their mark. The marketing company will emphasize gasoline sales under its Phillips 66 trademark, established in 1927 when a test car achieved 66 mph on U.S. Highway 66.
To make room for Conoco, I sold our positions in Occidental Petroleum. “OXY” has impressive reserves in development but Conoco is larger, growing even faster at this time, and has both a lower price to earnings and a higher dividend yield of 3.4%. Both Abbott and Conoco intend to maintain a combined total of their current dividend payments after their divisions. Each has an excellent record of dividend increases and I expect this worthy tradition to continue.
It is conceivable that Apple (AAPL-$585) might someday divide into one or more companies but that is hardly in the picture now. Such divisions sometimes occur under the pressure of antitrust complaints, as was the case with AT&T. All of Apple’s lines are in vigorously competitive markets and any such forced split-ups are unlikely.
The stock markets continue to make their best showing in years, aided by the business recovery, low interest rates and persisting reasonable stock valuations. Even the still grim employment figures ticked up slightly. All this points to the first potential whiffs of inflation with accompanying higher rates at some point in the future, probably in 2013.
Higher rates will weaken the values of bonds, a favored investment last year. I am slowly reducing our bond investments while increasing positions in CBRE Global Real Estate (IGR-$8), whose global holdings should keep its 6.7% yield intact. UltraShort 20+(TBT-$21), goes up when bonds go down and may tempt the more aggressive. The stock markets remain favorable and conservative investments in solid stocks like Abbott and Conoco should prove quite rewarding with their possible split-up premiums.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/