3 Potential Stock Spinoffs (RIMM, XOM, MHP)
Reports that media conglomerate Newscorp (NYSE: NWSA) (NASDAQ: NWS) is planning to split itself into two companies continues the recent trend of corporate spin offs. In the last few years, a number of high profile companies have announced plans to break up.
Last summer, Marathon Oil separated into two separate companies: the upstream drilling company Marathon Oil (NYSE: MRO) and the downstream pipeline and refining business Marathon Petroleum (NYSE: MPC).
Of course, there is good reason for some companies to split. Conglomerates composed of both high and low growth companies tend to get valuations from analysts that neither reflect a growth company nor a value company (resting somewhere in-between).
High growth companies tend to get higher valuations on earnings metrics. Spinning out these business can attract higher valuations and boost shareholder value.
Lower growth businesses (known as value businesses) tend to have large, stable cash flows. Value companies derive valuation from cash returned to shareholders through dividends, buybacks, or other means. Thus, by separating these two, companies can maximize shareholder value and boost share prices.
So, what are other companies that could consider splitting? While such an event is hard to speculate on, three companies that might consider breaking up operations sometime in the near future are McGraw-Hill (NYSE: MHP), Research in Motion (NASDAQ: RIMM), and Exxon Mobil (NYSE: XOM).
Speculation has been rising over the past year or so that McGraw-Hill would split itself into two companies. The first would contain the education and publishing businesses, while the other would be composed of Standard and Poors Ratings and other financial companies. Education publishing is a very low growth business with stable cash flows, so by separating the two, the full value of the financial businesses may be unlocked for investors.
Likewise, Research in Motion has also seen its share of break-up speculation, as the stock has slid to multi-year lows and sales continue to disappoint. RIM operates in two business lines: the hardware/handset business and the software business.
The handset business is much more of a growth business than the stable software business, and a break up could lead to shareholder profit. Software such as Blackberry Messenger is a cash cow, while the handset business has struggled amid competition from others such as Apple's (NASDAQ: AAPL) iPhone.
Exxon Mobil may also be a candidate to split, as it resembles Marathon prior to its breakup. With its $41 billion purchase of XTO Energy in 2009, the company is now a diversified driller of both oil and natural gas, and has extensive refining and distributing businesses. Separating these may unlock value.
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