When the history of American business over the last 15 years is written, one of the riddles that will have to be solved is how Wall Street could simultaneously believe that mergers, spin-offs, and divestment were all excellent strategies for unlocking "shareholder value." Of course, one size does not fit all, and it's certainly true that mergers make sense for some companies (though for many fewer than have merged in the past five years) while other corporations are better-served by spinning off or selling non-core operations. The problem is no clear rationale for distinguishing between these different situations has really emerged, making it seem as if deals are being done just because CEOs feel they need to do something.
So last week we had the AT&T-TCI deal, which promises to create an integrated cable-telephone giant that will, on its own, offer consumers everything they could ever want. This week we have Hilton splitting itself into two, creating separate hotel and gaming companies; Rupert Murdoch's News Corp. announcing that it will be spinning off Fox; and Republic Services, the waste-management portion of Wayne Huizenga's auto-dealership company Republic, spun off in an IPO. If last week we were supposed to think that size brought with it economies of scale and unbeatable reach, this week we're apparently supposed to think that smaller is better, and that companies are more likely to turn in solid bottom-line results if they're independent rather than divisions of larger corporations.
What's really at work here, of course, are two different things. First is the tremendous bias toward action--any action--that's been created by the boom in M&A activity and in public offerings over the past few years. Second, and not unrelated, is the unrelenting pressure on executives to keep their stock prices high. News Corp. will continue to own 80 percent of Fox, but unless Fox is going to be run qualitatively differently as an independent, its revenue and earnings will not change. What will change, News Corp. hopes, is the stock market's valuation of that revenue. Fox won't be making more dollars, but investors will value its dollars more highly since it's standing alone. The same principle is even more strongly at work in the Hilton deal. Investors are justifiably leery of the gaming industry because of slowing revenues and the possibility that there are just too many casinos in America (God forbid). By quarantining its successful hotel business from its gaming operations, Hilton expects a windfall as investors rush to buy the hotel stock.
One would assume, of course, that they would also rush to sell the gaming stock, just as one might reasonably assume that News Corp. without Fox is worth considerably less than News Corp. with it. But the governing assumption is that in a market as flush with capital as this one, the gains you reap from spinning off a company will outweigh whatever losses the old company will sustain.
None of this makes any sense, of course, if you assume--as we should--that in evaluating a business investors evaluate all the different parts of that business as well. But let us not be deterred by the absence of logic. Dealward, ho!
Notes from the Loony Bin:Wall Street Journal writer Elizabeth Bukowski begins her review of Richard Powers' new novel, Gain, with these words: "Whatever the booming Dow might suggest, Americans today are being told to be wary of capitalism." Set aside the fact that what's happening in Asia shows why we should be wary of capitalism, and consider Bukowski's assumption that there's more anti-capitalist rhetoric in America today than "yesterday," whenever that was. That's as preposterous an idea as I've come across in a long time. . . . Actually, this one comes close, also from today's Journal: "Wall Street analysts have long complained [Pennzoil] has a brand as recognizable as Coca-Cola but fails to fully exploit it." Right. Pennzoil is as strong a brand as Coke. Hey, have some 10W-40 and a smile.