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A number of big companies have recently announced spinoffs, a corporate action that typically occurs at the top of bull markets as executives grasp for ways to keep shareholders happy.
On Tuesday, Honeywell International and Pfizer both announced plans to shed or consider spinning off certain business units.
The number of completed U.S. spinoffs tracked by Dealogic increased to near-term peaks in 1999 and 2008, just before or around the last two major market tops. A bear market begins when stocks fall 20 percent or more from a recent high. Stocks haven’t dropped that much since this bull market, the second longest on record, began in March 2009.
“From a bull market perspective, when equities are highly valued and growth is hard to come by, [completing a merger or acquisition] is difficult,” said Decker Walker, a Chicago-based partner at The Boston Consulting Group. “The current high valuations support spinning off assets or divesting assets.”
Number of completed spinoffs by year
Source: Dealogic. 2017 figures as of Oct. 10, 2017.
Completed spinoffs in the U.S. rose to 88 in 1999 and dropped off to 80 in 2000, when the dotcom bubble burst, and fell to 55 in 2001, the data showed. The number of completed U.S. spinoffs rose from 24 in 2007 to 30 in 2008, before dropping to 17 in 2009, when stocks hit their lowest point during the financial crisis.
The total value of completed U.S. spinoffs by year has also tended to climb just around the time of the market crashes, the Dealogic data showed.
The value of U.S. spinoffs completed in 2000 nearly tripled from the prior year to $97.2 billion, and roughly doubled from 2006’s level to $170 billion in 2007, just ahead of the financial crisis, according to Dealogic data. In 2008, the total value edged lower to about $166 billion, before dropping to $54 billion in 2009.
Value of completed spinoffs by year
Source: Dealogic. 2017 figures as of Oct. 10, 2017.
After a lull between 2009 and 2012, the Dealogic data showed the number and total value of completed deals has picked up, reaching a recent high of $177 billion for 43 completed U.S. spinoffs in 2015. That year, the S&P 500 fell 0.73 percent.
The stock index leaped 9.5 percent in 2016 to record highs and has climbed another 13.8 percent this year.
To be sure, the number and value of spinoffs are still far below where they were last year and the prior two years. And increases in spinoff activity in 2015, 2016 didn’t lead to a major market top. Plus, it’s still too early to determine whether this week’s activity will continue the rest of the year and into 2018.
The Dealogic data only goes back to 1995 and does not include Tuesday’s announcements. Honeywell said it will spin off its home and ADI global distribution business and transportation systems into two independent, publicly-traded companies, together worth $7.5 billion. Pfizer said separately it is considering the sale or spinoff of its consumer healthcare business, worth an estimated $15 billion.
Some have argued that spinning off nonessential business units helps the company focus, while allowing the spinoffs to generate profits more efficiently.
“Spinoff[s] are back en vogue,” Michael Niland, U.S. divestitures services leader at PricewaterhouseCoopers said in an email. “However, divestitures (including spinoff and sales) are being driven by the need for companies to return to the core competencies and create focus on its strategic goals — the market is expecting and rewarding companies for their actions.”
The Guggenheim S&P Spin-Off ETF (CSD), whose top two holdings are Hewlett Packard Enterprise and PayPal, is up 18 percent this year, about 4 percent more than the S&P.
— Reuters contributed to this report.
