- There have recently been a number of spin-offs and breakups, including companies I own such as Abbott, Dover, and National Oilwell Varco.
- A recent article suggesting a midstream MLP spin-off by Chevron prompted me to organize my thoughts on this subject.
- As a long-term value investor I am somewhat suspicious of the argument for spin-off or breakup to "improve focus" or "unlock value".
- The least well-thought-out arguments for spin-off or breakup have involved Berkshire Hathaway.
- I have confidence in Chevron, whose management has produced good long-term ROIC, to make its own decisions.
Recently a number of successful companies have either spun off parts or broken themselves into two large parts. I happen to have held positions in three of them - Abbott Labs (NYSE:ABT), Dover (NYSE:DOV), and National Oilwell Varco (NYSE:NOV). Companies usually do this for one of two stated purposes: to "improve focus" or to "unlock value." A recent post by Michael Fitzsimmons suggesting a midstream spin-off by Chevron (NYSE:CVX), another company I own, prompted me to "focus" on this question and write a response to his article (he is a good contributor whom I follow).
The Abbott, Dover, and National Oilwell Varco spin-offs were immediately profitable to my portfolio in that the sum valuation of the two parts quickly exceeded the value of the previous single entity. I was neutral about the latter two, accepted their arguments for the spin-offs, and continued to hold both companies.
In the case of Abbott, I had been content to have their consumer and pharma businesses in a single entity, my premise being that the pharma business provided somewhat lumpy growth while the consumer product side provided cash flow evenness and continuity. I guess I still basically believe that. I held both surviving post-breakup companies for a while and then let them go to call writes - a mistake at this point, but a mistake I would probably repeat. When I hear calls for a breakup or spin-off at Johnson & Johnson (NYSE:JNJ) I have a similar lack of enthusiasm.
I feel the same way about Chevron. Chevron is doing fine. The management seems to know what it is doing. It is doing well at the business of finding oil and gas at reasonable cost and not reaching to explore and drill at exorbitant cost. Its downstream business provides a balance. They have an overall good ROIC. They seem to generally know what they are doing.
I think there is a larger point here. I am a value investor with a longer-term perspective, for the most part. This makes me somewhat skeptical about the argument for "unlocking value." Value is value. Sooner or later it tends to unlock itself via increases in book value, EBITDA, and operating earnings. In many cases it does not need to be "unlocked" to get an immediate jack in prices.
I am also not an enthusiast for the concept of improving "focus." Corporate leaders in this era are sufficiently compensated (and often wildly overcompensated) to manage to hold their companies in "focus." I believe this in spite of the fact that two of the companies I mentioned above, and which I own, did cite "focus." They may well be the exception, but my personal view, somewhat coarse, is that if "focus" is lacking in a multi-divisional business the executives with overall responsibility should either be replaced or provided by an outside contractor with a two by four to deliver moderate raps to the head every fifteen or twenty minutes. It should be like the NFL: you get the big bucks, you focus, watch your back, and take the raps to the head.
The least intelligent commentary about spin-offs or breakup have to do with Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), another company I own. In the case of Berkshire, the coexistence of unrelated subsidiaries works without a hitch and is synergistic, with the units requiring little capital providing funding for capital-intensive units and other investments. Almost all the argument I have read on breaking up Berkshire is badly informed and poorly thought out.
Berkshire's successful synergy, however, does suggest the contrary case in which a spin-off or breakup might be the correct action. The motivation would go a bit beyond "focus" to involve a division of the business which is an outlier, perhaps accidentally acquired or developed, which truly exists outside the range of competence of overall corporate management, in a way that cannot be readily fixed, and where synergy does not exist. I tend to take the management of Dover and National Oilwell Varco on faith about this. They have been successful operators and successful acquirers, so I give them the benefit of the doubt as divestors. I have the same broad confidence about the management of Chevron.