Corporate Restructuring for Fun (Not Profit) at Friedman, Billings, Ramsey (FBR)

Jun.26.06 | About: Cendant Corp. (CD)

I've written before about how irritating I find the great corporate restructuring dance to be, most recently when I sold my shares of Cendant (CD) last year.

Today, another company I used to own, Friedman, Billings, Ramsey (NYSE:FBR), is doing something very similar.

In the course of only a few years, the trend has turned from the importance of consolidating in order to "create synergies" to the importance of splitting a company up to "unlock value." As far as I can tell, in most of these situations the only folks benefitting from these corporate maneuvers are the bankers and consultants. FBR, being a banker themselves, certainly ought to know that.

FBR is another local company for me, just outside DC in Arlington, VA. It used to be a small brokerage house and a separate mortgage investment REIT, but in 2004 (I think) the REIT bought the broker and we ended up with a high-yielding REIT that had a reliable and growing yield, thanks to the extra cash flow that the brokerage spun off and that was used to reinvest in mortgage backed securities.

That turned out to be a pretty great idea for investors for a short while. FBR had a great 2004 and early 2005. But as soon as the great ride of the mortgage REITs appeared to be in danger (and, shortly after that, one of the founding partners got in some serious trouble), the company began to flounder. Even today, with a nice bounce from the spinoff news, the shares are much more than 50% below their highs.

As a former FBR owner, this looks quite distasteful. The company essentially restructured, at significant cost, to ride the wave of enthusiasm for high yield mortgage-backed securities (and REITs in general). Now that that wave had certainly crashed, they're spinning off the brokerage house, which is moderately successful in its niche, to, in my opinion, take advantage of the new cresting wave in enthusiasm for brokerage houses, just as the big guys have released stellar earnings yet again. I'd prefer to own companies that build sustainable businesses and manage them effectively through good and bad times. Not companies that feel they have to reorganize every couple years to make it appear as though they're doing something, or impress their friends on Wall Street.

That may well be unfair, but it's yet another reminder about the risks of buyouts and spinoffs. Be careful of them, as the synergies and cost savings don't always appear or, at least, don't often last. And the temptation to do something will often lead to a reversal within a few years and a spinoff to release the stock value that they themselves "locked up" with their quest for synergies.

And what you end up with, in the end, is a damaged-looking set of companies, an air of desperation, and some high-cost corporate transactions that have permanently destroyed at least some shareholder value.

Wow, I haven't been this curmudgeonly for a while. But I come by it honestly. I really liked FBR when I first bought it, well before I started this site, and I still think the company's plan had great merit and could have led to much more success if its management had been ethical, patient, and loyal to long-term shareholder interests.

FBR 1-yr chart: