by James Brumley | May 2, 2014 8:50 am
You know M&A mania is winding down when the best acquisition target Pfizer (PFE) could come up with is struggling rival AstraZeneca (AZN). Yes, AstraZeneca has an interesting cancer immunology pipeline (thanks to the 2013 acquisition of Amplimmune), but there’s little else under the company’s umbrella that could be a game-changer for Pfizer, leading many to wonder if $100 billion is too much to put on the table.
The possible union of AstraZeneca and Pfizer isn’t the only thing that suggests all the good buyout targets have already been snagged. Newmont Mining (NEM) ended M&A talks with Barrick Gold (ABX) earlier this week. Snapchat said no to a generous $3 billion offer from Facebook (FB) late last year. Allergan (AGN) shareholders are balking at the $47 billion bid from Valeant (VRX) — not just because they believe the company is worth more, but because the two companies are so culturally different; integration could be a problem.
So what, pray tell, are CEOs going to do next in the name of creating value for shareholders? Ironically, the next big thing companies are apt to use to prove management’s mettle is the exact opposite of mergers and acquisitions: spinoffs.
In fact, the rise of the spinoff as the preferred way to keep investors interested may already be underway. Earlier this month, co-founder of The Spinoff Report, Ryan Mendy, predicted that North American companies could raise as much as $2 trillion this year by spinning off as many as 46 companies, which would be a record.
That being said, despite the spinoffs already in the works, it’s the spinoffs that aren’t underway yet that are some of the most compelling, and perhaps a little more likely the market may realize. Four of these possible spinoffs are especially enticing:
Don’t laugh — it’s more likely than you might think.
A little more than a year ago, Oppenheimer analyst Tim Horan recommended Amazon (AMZN) spin off its cloud-computing business, Amazon Web Services (AWS). The idea wasn’t especially well-received at the time, though most saw the broad upside of such a split — more of Amazon’s e-retail rivals might be willing to tap the highly-profitable AWS if that service provider wasn’t ultimately controlled by a competitor.
The downside of spinning off Amazon Web Services is that it would expose the e-commerce aspect of the company for what it is … a cash-burning operation that may never find its way out of low-marginville. That could eventually be devastating for AMZN stock.
Well, the heat may now finally be turned up enough to get the discussion going within Amazon’s war-planning room. Why? After nearly fifteen years of capital expenditure growth that’s moved in lock-step with revenue growth, AMZN stock owners may finally be losing patience.
Merck (MRK) has made no bones about its desire to refocus on pharmaceuticals. While the bulk of that effort has proactively put its consumer care division up for sale, Merck is quietly interested in letting go of its animal health segment.
It’s not a bad business line; had Zimax not been suspended last quarter, the animal health unit would have posted a 5% improvement in year-over-year revenue for Q1. But, the animal care division is a headache for the company … not small enough to simply throw away, but not big enough to justify the time and resources it currently consumes.
For perspective, Merck’s animal care business generated $3.4 billion in sales last year, which was about 7% of the company’s total revenue. Assuming the fairly typical normal price tag of 20 times EBITDA for an up-and-running unit, one could make the case that the Merck animal care unit is worth north of $8 billion if it were to be spun off.
While Microsoft (MSFT) isn’t the software powerhouse it was fifteen years ago, it’s still a powerhouse, and isn’t going anywhere anytime soon.
That said, life would be so much better — and easier — for the company if it wasn’t distracted by its relatively minor Xbox business. It’s usually a profitable venture, barring the periods when it develops and manufactures new systems. But it can be a drag on time and resources.
Selling the gaming unit isn’t a new idea. It simply wasn’t a hot-button issue again until last year, when a new Xbox hit shelves. The problem is, new CEO Satya Nadella is a big fan of the gaming device, and says he’s not letting go.
Then again, it’s not like Nadella can announce the sale of the division before it’s ready to make such a split. So maybe investors just need to be a little more patient.
Saving the least likely for last, how cool would it be to see Apple (AAPL) separate its hardware division from its services divisions? The former is iPhones, Macs, and iPads, while the latter operates, among other things, iTunes and any subscription-based business models AppleTV manages to muster.
Both divisions are profitable. The benefit of breaking them up is letting the market decide if it wants to ride the hot and cold growth stemming from launches of new iPhones and iPads, or coast on the relatively-recurring revenue generated by iTunes … particularly now that iTunes Radio is available and AppleTV has scale.
The counter-argument is that Apple became great mainly because the company controlled the entire consumer experience, from start to finish, and splitting the company into two pieces might negate some of the self-serving connection between devices and services. However, that presumes we’ll see Steve Jobs-like innovation (of hardware) in the future, which doesn’t appear likely at this point.
Breaking Apple into two units might actually jolt both halves into thinking creatively again.
In the same sense that economists have predicted seven of the last four recessions, market journalists are likely to predict far more spinoffs than actually materialize. So, take none of these predictions as an absolute certainty. On the other hand, all four parent companies are strong in their own right, and would make for solid investment even if the described spinoff never plays out.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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