Spinoffs make sense when a firm has heterogeneous business units, (that is, divisions with wide disparity in fundamental traits). The underlying assumptions are, (1), that it is difficult to manage a large diverse conglomerate, and, (2), that the market is not very efficient at valuing "conglomerates", primarily because the 10Ks of conglomerates do not do a good job of giving you all the details of the fundamental traits of divisions. Within the backdrop of modern-day contracting and a tight labour market, spinoffs also allow a firm to be more efficient in designing compensation contracts for management, (stock options that reflect the prospects of the relevant division, etc.) Therefore, "complete" spinoffs make a lot of sense to shareholders, (by "complete" I mean the division is first valued by the market and new shareholders in a partial IPO, and then all the remaining shares are distributed to old shareholders: that is, the division is then freely and publicly traded as a new firm). However, the difficult psychological hurdle for current management to cross is the fact that it has to give up control of the division. There are two ways of keeping control: (1) Do a spinoff and keep majority ownership, (that is, do not distribute the shares to the shareholders) or (2) Issue tracking stock instead of doing the spinoff. Roth appears to be talking about using the first technique.
Needless to say, one needs to be skeptical of incomplete spinoffs. The only circumstance, that I can think of, under which incomplete spinoffs might make sense is if the market believes that the absence of Roth's management-presence would cause the division to fall apart. |
