Firms near and far ditching bigger-is-better mind-set

October 11, 2014

U.S. companies are breaking themselves apart at a nearly unprecedented clip, a trend that’s already reshaping the corporate landscape in Indiana and is sure to bring more change.

In recent days, the tech giant Hewlett-Packard Co. said it would split in half, separating its computer and printer businesses from its faster-growing hardware and services operations, and eBay Inc. said it would spin off PayPal.

Closer to home, Merrillville-based utility NiSource Inc. said in late September that it would split off its natural gas pipeline and related businesses into Columbia Pipeline Group Inc., a new publicly traded company to be based in Houston.

The momentum has been building for a while. In December 2013, the Irish conglomerate Ingersoll Rand spun off its Carmel-based security business—a move that netted the region a new public company, Allegion PLC, with $2.1 billion in revenue.

Locally based Simon Property Group jumped on the spinoff train in May, creating Maryland-based Washington Prime Group to own its strip centers and smaller malls.

The motivation for the deals is universal: Directors decide investors will value two firms with their own focused strategies more highly than one big, multi-pronged conglomerate.

In the case of Virginia-based Gannett Co., which in August announced plans to split, it was all about kindling greater interest in its steadily growing broadcast and digital businesses by casting off its out-of-favor print publications—The Indianapolis Star and dozens of other newspapers.

For Simon, it was about unlocking value from a part of the company—strip centers and smaller malls—that investors, and even management, had paid less and less attention to as Simon swelled into the world’s largest real estate company.

“Over the years, we have seen a number of very attractive investment opportunities in these asset classes that we have not pursued given our primary focus on our global portfolio of larger retail assets,” CEO David Simon said in a conference call with analysts when the plan was unveiled in December.

The game plan seems to be working. In September, Washington Prime announced it was buying Ohio-based Glimcher Realty Trust for $2 billion—a deal that probably would not have happened without the spinoff. As part of the transaction, which will rechristen Washington Prime as WP Glimcher, Simon is buying two of Glimcher’s high-end malls for $1.09 billion.

“We went public just three months ago, expecting to utilitize our strong platform, relationship with Simon, cash flow and investment-grade balance sheet to grow,” Washington Prime CEO Mark Ordan said in a statement when the deal was announced. “This transaction with Glimcher checks every box, very early in our company’s trajectory.”

It’s difficult to predict which area firms might be swept up next in the spinoff frenzy.

IBJ reported in March that Michigan-based Dow Chemical likely would cast off locally based Dow AgroSciences Inc. into a stand-alone public company if the thriving subsidiary achieves its goal of doubling profit over the next couple of years.

“We’re all about maximizing its value and realizing its value,” Dow Chemical CEO Andrew Liveris told analysts this spring He said “waiting for the right moment to maximize that value … is our whole drive.”

Another company long the subject of spinoff speculation is Greenfield-based Elanco, Eli Lilly and Co.’s fast-growing animal health division.

On one hand, Elanco has helped carry Lilly through a tough stretch of patent expirations on key drugs. On the other, investors might value Elanco more highly as a pure-play animal health company.

Lilly rival Pfizer opted for the spinoff approach with its animal health business, which went public as Zoetis Inc. in January 2013 and has since appreciated 42 percent.

Lilly executives have swatted down spinoff talk—“we’re comfortable with that business, and we’re going to keep it,” CEO John Lechleiter said in February 2013—while moving to bulk up the subsidiary.

In April of this year, Elanco announced it was buying Novartis Animal Health for $5.4 billion, a deal that will make the Greenfield company the second-biggest player in the field.

Lilly has played the spinoff card before—most notably with its medical-device unit, which went public under the name Guidant Corp. in 1994.

That deal serves as a testament to the risks and opportunities of the spinoff strategy. Guidant thrived for years as an Indianapolis public company, giving the central Indiana economy a boost in the process.

But once companies cast off a business, they also give up control over its long-term fate. Businesses that once seemed firmly rooted here can suddenly end up in play. That’s what happened with Guidant, which Boston Scientific acquired for $27 billion in 2006. After the deal closed, all the local jobs disappeared.•


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