Big-Name Spinoffs Wall Street Would Love

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Big-name spinoffs have been the rage in 2011. Most recently, we have been hit by news that Hewlett-Packard (NYSE:HPQ) will spin off its PC business — a headline that might have been overshadowed by the overall dumpster fire that is HP these days. And then there’s the other smoking wreckage of a tech company, AOL (NYSE:AOL), which is supposedly meeting with a top M&A team to discuss how to sell the company for parts according to reports last week.

But the Hewlett-Packard spinoff and the prospect of an AOL split are just the latest news bites. There is the recently unveiled Kraft (NYSE:KFT) plan to separate into two food companies — a global snack food powerhouse and a North American grocery specialist. And there were handfuls of energy sector spinoffs that have separated “upstream” crude oil operations from “downstream” businesses — including the high-profile split between Marathon Oil (NYSE:MRO) and Marathon Petroleum (NYSE:MPC), among others. And before Google (NASDAQ:GOOG) made its move with a massive buyout a few weeks ago, Motorola split up into the now-bought-out Motorola Mobility (NYSE:MMI) and its enterprise business Motorola Solutions (NYSE:MSI) in January.

So who will be spinning off operations next? Here are four big-name companies that could benefit from divvying up their businesses and find a warm reception to the new companies on Wall Street.

General Electric

General Electric (NYSE:GE) is one of those corporate octopuses that touches a wide variety of businesses — organized under the disparate units GE Capital, GE Energy, GE Technology Infrastructure and GE Home & Business Solutions.

But don’t think GE is only interested in hoarding assets and businesses. In 2009, it announced a deal to transfer a 51% controlling stake in the NBC Universal division to cable giant Comcast (NASDAQ:CMCSA). And in 2004, GE completed the spinoff of most of its mortgage and life insurance assets into the independent Genworth Financial (NYSE:GNW).

This latter spinoff of Genworth is perhaps the most instructive to what GE could do in the current market with GE Capital. The elements of General Electric engaged in commercial lending, leasing and financial services could easily be packaged into another company — freeing the specter of financial troubles from the core businesses of GE. After all, it was the frozen credit market and exposure to loans that brutalized General Electric stock during the financial crisis and was the prime driver in an ugly 68% dividend cut in early 2009.

It’s worth noting that GE Capital wouldn’t be put on an iceberg and pushed out to sea, either. With a book value of about $70 billion, the recent acquisition of U.K. consumer finance firm Credit Agricole for $4.9 billion and an overall improvement (relatively speaking) in its portfolio of loans means that General Electric’s finance business is pretty healthy. After all, in its July earnings report, GE Capital reported that it turned $1.7 billion in profit during the quarter.

Google

There are a host of kinky divisions at Google (NASDAQ:GOOG) right now, including green energy projects, renewable energy investments, not to mention a steady drumbeat of acquisitions over the past several years that has made the tech giant every bit as much of a conglomerate as the aforementioned GE, including the 2005 purchase of broadband Internet access services from AOL (NYSE:AOL).

What with the mammoth purchase of Motorola Mobility and its related tablet and smartphone operations, it seems Google is growing even more complex. That could mean the time is right for some spinoffs before the company gets too bogged down in disparate operations and a crazy org chart.

That’s why I think it would make sense to separate the core Google businesses like YouTube, Android smartphone software (and now Motorola hardware), as well as its flagship search and advertising services from the quirky brainchildren of its engineers. A so called “Google Innovations” spinoff could lump together all the potentially game-changing technologies that GOOG is working on right now — from its wind farm in Oklahoma to its cars driven by robots to biotechnology ventures that have included investments in firms like Adimab.

The problem, of course, would be that many of these operations aren’t going to make big profits any time soon — or in some cases, any profits. But it would be interesting to put the legacy businesses in one basket and the explosive potential of Google in another if their numbers could get worked out. Clearly Google’s leadership at board and executive levels have bigger fish to fry, and Google Innovations could benefit from a hard-charging and free-wheeling CEO that could lead the campaign into new territory while other folks worry about Chrome for mobile devices or how to increase ad sales 5% this quarter.

What’s more, Google could directly incentivize its employees on these projects with stock in the Google Innovations arm only. After all, if robot vehicles “take off” to generate $100 million in revenue next year, that cash will get lost in the shuffle of some $30 billion in annual revenue. It could pay for both GOOG and its workers to figure out a model like this.

McGraw-Hill

Publishing giant McGraw-Hill (NYSE:MHP) recently has been in the news because of its Standard & Poor’s subsidiary recently downgrading U.S. debt. from AAA to AA+. Perhaps some didn’t even know that S&P is a division of the same company that publishes high school textbooks and J.D. Power consumer reports. But they should now.

Aside from the obvious hullabaloo over the S&P downgrade creating headwinds for the corporate parent, it makes good sense for MHP to spin off its financial and business services from its other publishing operations.

Strangely enough, its information and media unit is what’s dragging down the valuation of the company — despite the backlash some have in the wake of the credit downgrade. So a split perhaps would be better now than ever before.

A spinoff of S&P and McGraw-Hill’s related services business would not only liberate the better-performing assets of this financial arm at MHP, but allow new management to find value in a publishing unit that still has a lot of potential.

Consider Bloomberg Businessweek. The magazine lost $60 million in 2009 but reportedly will raise its paid circulation to 980,000 this year — and enjoy 15% more paid ad pages. It still is not profitable, but president Paul Bascobert expects it to be soon.

This proves better management could meet the needs of the publishing businesses at MHP if given the chance. Perhaps a dual approach to the businesses of McGraw-Hill could benefit both companies and result in bigger profits for each in the long run.

Intel

In 2009, Advanced Micro Devices (NYSE:AMD) divested its manufacturing operations — so-called semiconductor foundry businesses — to create a joint venture known as GlobalFoundries Inc. At the time, this AMD spinoff was billed as a move to focus solely on chip design and liberate AMD from the costly business of finding billions of dollars to construct new chip plants.

The result? Since January 2009, AMD stock has soared some 170% while its top competitor Intel (NASDAQ:INTC) is up 40% in the same period. Obviously there are other factors at play than just the divestiture of foundry operations. But Intel certainly could learn a thing or two from the move.

What’s more, so-called “fabless” semiconductor stocks — that is, chip makers that don’t technically make the chips but only license their use to other manufacturers — are popular with many tech investors. Consider ARM Holdings (NASDAQ:ARMH), which is up 70% in 12 months thanks to its relationship with Apple (NASDAQ:AAPL) mobile devices. All without never actually making those chips itself, but simply owning the rights to the design.

Would Intel benefit in kind by following AMD’s lead and spinning off its foundry business? Perhaps. And some experts argue that even the fabrication arm itself could thrive under proper management. Semiconductor insiders claim the foundry industry will grow from $30 billion in 2009 to $50 billion in 2015 thanks to the gadget boom in recent years.

Intel could unlock value for both divisions if it spun off its manufacturing operation in the same way AMD did with GlobalFoundries.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


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