Spinning Internet Deals
In an attempt to take advantage of Wall Street's generous valuations for Internet stocks, numerous publicly traded companies are considering spinning off their online operations.
In just the past month, direct marketer Creative Computers filed to spin-off about 20 percent of its online auction site to the public and Navarre Corp. said it also intends to register its NetRadio subsidiary for an IPO.
And that could be just the beginning. The management of many companies, from small caps like personal care products distributor Allou Health & Beauty to giant media concerns like Playboy Enterprises, have expressed frustration that their significant and rapidly growing online operations aren't being valued in the same way as those of pure play competitors.
"You may very well see spin-offs happen more often. There's no question that pure plays get a lot more attention," said Doug Arthur, managing director of research at Morgan Stanley Dean Witter.
Although spin-offs can be structured in several different ways, many will likely follow the example of Creative Computers, which plans on spinning off the 80 percent of uBid it will own after the IPO to its shareholders sometime in 1999. In another type of spin-off, the parent corporation keeps a significant stake in the new company, as Ford did with its Hertz car rental unit last year.
Either way, the hope is that the two companies will be valued higher separately than they were as part of one unit. Even the announcement of Creative's spin-off boosted shares of the company by 44 percent.
As it is, thriving Internet businesses can often be a drag on a parent company's stock price since they tend to reduce earnings, something that pure play Internet stocks don't have to worry much about, said Bill Harnisch, president and chief investment officer of Forstman-Leff Associates, the largest institutional shareholder in Barnes & Noble.
Many observers have pegged Barnes & Noble as one company likely to spin-off its online operations. According to a recent research report from Salomon Smith Barney Maureen McGrath, Barnes & Noble could be trading about 35 percent higher if its online operations, expected to generate $100 million in sales this year, were valued in the same way as Amazon.com.
"Its Internet business is subtracting from the stock price so you either have to convince people to look at it differently or you have to spin it off," said Harnisch, whose firm owns more than 15 percent of Barnes & Noble.
Barnes & Noble executive vice president of finance Marie Toulantis told CBS MarketWatch.com that the company is considering a possible spin-off. "We're very well-positioned in the capital markets and we'll be exploring all of these options with a view toward enhancing shareholder value," Toulantis said.
The benefits of a Barnes & Noble spin-off would go well beyond raising money and increasing shareholder value, according to observers.
"It would attract different type of investor and give the Internet venture a little more focus, which is necessary in a fast growing and competitive market place," said Ryan Jacob, portfolio manager of The Internet Fund and research director of IPO Value Monitor.
The same benefits would apply to most potential spin-offs, but the decision isn't always a clear-cut one. Many companies are resisting the urge to reap short-term stock price gains by giving up full control of their online operations, which are often the fastest-growing part of a company's business.
Written By Darren Chervitz