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Why divestitures and spinoffs are becoming common

Anne Shields

Must-know: HP spins off to form two new companies (Part 9 of 9)

(Continued from Part 8)

Corporate spinoffs are common

Disruptive technologies like social, mobile, analytics, and cloud (or SMAC) are driving change in the IT and technology sector. This increases the need for continuous innovation. The industry has to adapt to new digital areas.

Large technology firms—that provide hardware, software, and services—have a hard time staying competitive in this rapidly changing environment. As a result, they’ve resorted to spinoffs to trim down their operating footprints.

The above chart shows that the Guggenheim Spinoff ETF (CSD) outperformed the S&P 500 since it began trading in 2006. It gained 224.7% over the last five years—compared to 106.2% for the S&P 500. The assets increased from $7 million to $834 million.

2014 is the biggest year for spinoffs since 2000

The announcement of eBay (EBAY) spinning off PayPal and HP (HPQ) splitting into two companies are just new additions in the corporate spinoff list. Meg Whitman is HP’s CEO. She led eBay before joining HP. eBay bought Paypal under her guidance in 2002. In early 2014, IBM (IBM) sold its x86 server business to Lenovo for $2.1 billion. It wants to focus on the software market and cloud. The deal concluded recently.

Spin-Off Research is a firm that tracks corporate splits. It explained that 2014 is shaping up to be the biggest year for spinoffs since 2000. There will be a record of 45–50 spinoffs.

According to Goldman Sachs, spinoffs are becoming a popular source of fee revenue within the investment bank industry. This phenomenon isn’t limited to the technology industry. It gripped other sectors as well. In 2014, GE (GE) announced the spin off of its North American credit card business. GE announced the initial public offering (or IPO) for its credit card unit, Synchrony Financial.

Leaner operations are preferred

Joe Cornell is publisher at Spin-Off Research. He explained that “Companies that are smaller and more focused usually run better and management tends to get their performance up. When they are out of a spinoff by 12 or 24 months, they usually start heading in the right direction. Portfolio managers don’t want to invest in something that is eight or ten different businesses. They prefer to invest in pure plays.”

HP and eBay’s shares were up 6.5% and 7.5%, respectively, on the day of the announcement about the spinoffs.

Associated synergies between the company’s operations, increasing competition, and changes in the market environment are some of the factors that play an important role in an organization’s decision to operate as a standalone or a diversified business.

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