Spinoffs happen. Seems nice, but beware…
Whole Lotta Shakin’ Goin’ On
I can’t say that it is more now than previously, but spinoffs happen. Sometimes from the biggest companies. Recently, Johnson & Johnson spins off Kenvue. General Electric is taking its time, but the first thing spunoff was GE HealthCare. And so many other companies have done it as well. Is is worth it?
What’s The Point?
Some of the professed reasons are valid. Primarily, it is possible for companies to be too unfocused, and thus a spinoff individuates, hopefully for the better.
“Unlocking value” is a buzzword, but it has some merit. It is possible for companies to be valued higher as a separate entities than as part of a larger organization. (Said is “possible,” but not always of course.)
Then of course there is regulatory pressure. Sometimes things are forced.
On the Golf Course
John D. Rockefeller was reportedly playing golf on May 15, 1911 when the Supreme Court ruled that Standard Oil Company was in violation of the Sherman Antitrust Act and should be dissolved into individual companies. Rockefeller said “Buy Standard Oil.” (Financially, anyone who did made out very well.)
Other Reasons
There is the perspective that spinoffs are sometimes used to get rid of unwanted liabilities. If some subsidiary is sued and facing substantial penalties, sometimes the perceived “solution” is to spinoff the subsidiary (and perhaps allow it to enter bankruptcy) and so rid that main company of the problem. This does not always work.
A milder version of this activity is to just spin off a slower part of a company after saddling it with debt. This action seemingly causes a split into a “good company” and a “bad company.” While these labels seem straight-forward, it is not always to determine which will end up being good or bad.
Some
Some spinoffs are very successful The 2013 spinoff of Abbvie from Abbott Labs has been a great success. It could be argued that Abbvie has gone on to outdo Abbott Labs.
On the other hand, some spinoffs get poor results. Spinning off and saddling a low performing company with debt and foisting it off on shareholders is a time-tested but underhanded business practice. Adding indignity, the parent company will sometimes cut its own dividend because it considers the spinoff a way of paying shareholders.
Bottom Line
I’d say that spinoffs have a mixed record. Most probably just muddle by, without any overarching benefit. Once in a while there’s a big winner. Other times, it is ho-hum.
It Has Been Said
I recently read a blog post (unfortunately I don’t recall where) in which the writer called these spunoff companies “garbage companies,” and as soon as there is a spinoff, he sells any stock he obtained from the new company. Since the prospects of the new company are unknown, he feels that he could probably use the money he gets from selling in better opportunities.
Structure Questions
In some cases, the spinoff will occur, and the only thing a shareholder has to do is… nothing, as the spinoff shares are assigned to the shareholders. This was the case for example for the General Electric shareholders to obtain GE HealthCare shares.
In other cases (like Johnson & Johnson to Kenvue), shareholders must tender some JNJ shares to obtain KVUE shares.
In the former case, “automatic”-type spinoffs, the only determination I need to do is whether to keep the new shares or sell them. In the latter-type cases, I need to decide in advance several things: (1) whether I am willing to give up some shares in the parent company, (2) how many, (3) whether I want to obtain shares in the new company.
For the case of Johnson & Johnson to Kenvue, it seems to me that JNJ is a known entity, with KVUE being the unknown. However, some of JNJ’s more lucrative brands are now in Kenvue. So it is likely in my view that Kenvue will also prosper. Kenvue’s initial planned dividend of 20 cents per share per quarter places its yield at about 3.4%, somewhat higher than JNJ’s 2.8%.
But overall it is disappointing I would not receive KVUE shares directly, as from a special dividend. I would rather not give up JNJ shares.
As a JNJ shareholder, I received a prospectus in the mail regarding the tender-spinoff. It as thick enough to be as content-full as several copies of War and Peace combined. Did I read it? No. Since I made my decision about whether to tender, I did not see the need to delve into it.
What to do is a personal decision. I purchased some KVUE shares when KVUE first went public in May of this year. The distribution of KVUE shares from JNJ has not yet happened. But since I already own some KVUE and I don’t wish to reduce my JNJ holdings, I so not feel the need to tender JNJ shares. But that’s just me.
What’s your take on spinoffs in general? Let me know here.
The painting “The Kiss of Peace and Justice” was painted in 1654 by Laurent de La Hyre. The painting’s date coincides with the end of the Fronde, a period of civil war in France.
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