University of Colorado-Boulder



University of Colorado-Boulder

Leeds School of Business

FNCE 7330 Sanjai Bhagat

Ph.D. Seminar in Empirical Corporate Finance Office: KOBL S431

Fall 2017 Office Hours: T (1 pm – 3 pm)

sanjai.bhagat@colorado.edu

I. Course Objective

The objective of the course is to provide the student with an understanding of and the ability to conduct scholarly research in the following corporate finance topics: mergers and takeovers, corporate governance, corporate restructuring, management compensation, capital structure, corporate financial strategy, corporate investment policy, and valuation.

II. Course Materials

Course materials consist of scholarly journal articles and working papers.

Lecture notes/overheads and class announcements can be accessed from my home-page:



III. Course Outline and Readings

A. Background

1. E.F. Fama, "Efficient Capital Markets: II," Journal of Finance 46, 1991, 1575-1618.

2. G.W. Schwert, “Anomalies and Market Efficiency,” University of Rochester working paper, 2002.

3. D. Burgstahler, "Inference from Empirical Research," Accounting Review 62, 1987, 203-214.

4. S.J. Brown and J.B. Warner, "Using Daily Stock Returns in Event Studies," Journal of Financial Economics 14, 1985, 3-31.

5. MacKinlay, Craig. 1997. "Event Studies in Economics and Finance," 35 Journal of Economic Literature 13-39.

6. Barber, Brad and John Lyon. 1997. "Detecting Long-Run Abnormal stock returns: The Empirical power and specification of Test Statistics," 43 Journal of Financial Economics, 341-372.

7. Kothari, S.P. and Jerold Warner. 1997. "Measuring Long-Horizon Security Price performance," 43 Journal of Financial Economics 301-340.

8. Lyon, John, Brad Barber and Chih Tsai. 1999. "Improved Methods for Tests of Long-Run Abnormal Stock returns," 54 Journal of Finance 165-201.

9. Barber, Brad and John Lyon, "Detecting Abnormal Operating Performance: The Empirical Power And Specification Of Test Statistics," Journal of Financial Economics, 1996, v41(3,Jul), 359-399.

10. Sanjai Bhagat and Roberta Romano, “Event Studies and the Law: Part I: Technique and Corporate Litigation,” 2002, American Law and Economics Review V4 N1.

B. Corporate Governance and Corporate Control

Mergers and Takeovers

1. S. Bhagat, A. Shleifer, and R.W. Vishny, "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity, 1990, 1-84. target-gain-goodfile.doc 

2. G. Andrade, M. Mitchell, and E. Stafford. "New Evidence and Perspectives on Mergers." Journal of Economic Perspectives (2001): 103-120. NewEvidenceMergers.ppt



3. Olivier Dessaint, Andrey Golubov, Paolo Volpin, Employment protection and takeovers, Journal of Financial Economics 125, 2017, 369-388.

4. E.H. Kim and V. Singal, "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review 83, 1993, 549-569.

5. Hosken, Daniel S. and Tenn, Steven, Horizontal Merger Analysis in Retail Markets (January 19, 2015). Available at SSRN:  or 

6. S. Bhagat, M. Dong, D. Hirshleifer and R. Noah, "Do Tender Offers Create Value?" Journal of Financial Economics, 2005, V76 N1, 3-60. b-hirshleifer.ppt

7. S. B. Moeller, F. P. Schlingemann, R. M. Stulz, “Firm Size and the Gains From Acquisitions,” Journal of Financial Economics 73, 2004, 201-228.

8. S.B. Moeller, F. P. Schlingemann, and R.M. Stulz, “Wealth Destruction on a Massive scale? A Study of Acquiring-Firm returns in the Recent Merger Wave, Journal of Finance 60, 2005, 757-782.

9. J. Harford, M. Humphery-Jenner, R. Powell. “The sources of value destruction in acquisitions by entrenched managers,” Journal of Financial Economics, Volume 106, November 2012, Pages 247–26.

10. U. Malmendier and G. Tate, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction,” Journal of Financial Economics 89, 20-43, 2008.

de Bodt, Eric and Cousin, Jean-Gabriel and Roll, Richard, Empirical Evidence of Overbidding in M&A Contests (March 30, 2016). Available at SSRN:  or 

11. M. Zhao and K. Lehn, “CEO Turnover After Acquisitions: Do Bad Bidders Get Fired?” 2006, Journal of Finance 61, 1759-1812.

12. S. Bhagat, S. Malhotra and P.C. Zhu, “Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants,” Emerging Markets Review, Volume 12, September 2011, Pages 250-27.

11. I. Erel, R.C. Liao, and M.S. Weisbach, “Determinants of Cross-Border Mergers and Acquisitions,” Journal of Finance 67, 2012, pages 1045–1082.

12. M. Cain, S. McKeon, S. Solomon, Do takeover laws matter? Evidence from five decades of hostile takeovers, Journal of Financial Economics 124, Issue 3, June 2017, Pages 464-485.

Spinoffs and Corporate Refocusing

1. B. E. Eckbo and K.S. Thorburn, Corporate Restructuring, Foundations and Trends in Finance, 2013.

2. P. G. Berger and E. Ofek, “Causes and Effects of Corporate Refocusing Programs,” Review of Financial Studies 12, 1999, 311-346. Spinoffs.ppt





3. L Daley, V. Mehrotra, and R. Sivakumar, “Corporate Focus and Value Creation: Evidence fron Spinoffs,” 1997, Journal of Financial Economics 45, 257-281.

4. S. Krishnaswami and V. Subramaniam, “Information asymmetry, Valuation, and the Corporate Spin-off Decision,” 1999, Journal of Financial Economics 53, 1999, 73-112.

5. S. Ahn and D.J. Denis, “Internal Capital Markets and Investment Policy: Evidence From Corporate Spinoffs,” Journal of Financial Economics 71, 2004, 489-516.

6. T.R. Burch and V. Nanda, “Divisional Diversity and the Conglomerate Discount: Evidence From Spinoffs,” Journal of Financial Economics 70, 2003, 69-98.

7. L. Cohen and D. Lou, “Complicated Firms,” Journal of Financial Economics 102, 2012, 383-400.

Corporate Governance

1. R. LaPorta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, “Investor Protection and Corporate Governance,” Journal of Financial Economics 58, 2000, 3-28.

IntroductionCorporateGovernance

2. J.A. Brickley, R.C. Lease and C.W. Smith, Jr., "Ownership Structure and Voting on Antitakeover Amendments," Journal of Financial Economics 20, 1988, 267-292. Antitakeover.ppt

3. S. Bhagat and R.H. Jefferis, "Voting Power in the Proxy Process: The Case of Antitakeover Charter Amendments," Journal of Financial Economics 30, 1991, 193-226.

4. D. DelGuercio and J. Hawkins, “The Motivation and Impact of Pension Fund Activism,” Journal of Financial Economics 52, 1999, 293-340.

5. L. Bebchuk, A. Brav and W. Jiang, “The Long-Term Effects of Hedge Fund Activism,” Harvard University working paper, 2013.

6. S. Bhagat and B. Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance” Journal of Corporation Law, 2002, Volume 27, Number 2. b-black.ppt

7. S. Bhagat and R.H. Jefferis, The Econometrics of Corporate Governance Studies, 2002, MIT Press.

8. S. Bhagat and B. Bolton, “Corporate Governance and Firm Performance,” Journal of Corporate Finance 14, 257-273, 2008. Corporate Governance – Performance.ppt

9. S. Bhagat and B. Bolton "Director Ownership, Governance and Performance," Journal of Financial & Quantitative Analysis, 2013, Sox-GovernancePerformance.

10. S. Bhagat , B. Bolton, and R. Romano, “The Promise and Pitfalls of Corporate Governance Indices,” Columbia Law Review, v108 n8, pp 1803-1882, 2008

11. S. Bhagat, Financial Crisis, Corporate Governance, and Bank Capital, Cambridge University Press, 2017. Financial Crisis, Corporate Governance, and Bank Capital

12. L. Fauver, M. Hung, A. Taboada, Board reforms and firm value: Worldwide evidence, Journal of Financial Economics 125, Issue 1, July 2017, Pages 120-142.

Management Compensation

1. M.C. Jensen and K.J. Murphy, "Performance Pay and Top-Management Incentives," Journal of Political Economy 98, 1990, 225-264.

2. B. J. Hall and J. B. Liebman, “Are CEOs Really Paid Like Bureaucrats?” 1998, Quarterly Journal of Economics 108, 653-691. Hall-Liebman.ppt

3. C.S. Armstrong, D. F. Larcker, G. Ormazabal, and D. J. Taylor, “The Relation Between Equity Incentives and Misreporting: The Role of Risk-taking Incentives,” Journal of Financial Economics 109, 327-350, 2013.

4. Armstrong, C. S., A. Jagolinzer and D. Larcker, “Chief Executive Officer Equity Incentives and Accounting Irregularities”, Journal of Accounting Research 48, 225-271, 2010.

5. S. Bhagat and R. Romano, “Reforming Executive Compensation,” European Company and Financial Law Review, vol 7, no. 2, pp. 273-29, 2010. ReformingExecComp

6. B. Bennett, J. Bettis, R. Gopalan, T. Milbourn, Compensation goals and firm performance, Journal of Financial Economics 124, Issue 2, May 2017, Pages 307-330.

Finance and Law

1. S. Bhagat and R. Romano, “Empirical Studies of Corporate Law,” in Handbook of Law & Economics, 2007. CorporateLaw.ppt

2. J.M. Karpoff, D.S. Lee and G.S. Martin, “The Cost of Cooking the Books,” Journal of Financial and Quantitative Analysis, 43 (September 2008), 581-612.

3. J.M. Karpoff, D.S. Lee and G.S. Martin , The consequences to managers for financial misrepresentation, Journal of Financial Economics,Volume 88, Issue 2, May 2008, Pages 193-215

D. Capital Structure

1. C. Parsons and S. Titman, “Empirical Capital Structure: A Review,” Foundations and Trends in Finance, 2009.

2. S. Bhagat, J.A. Brickley and J.L. Coles, "The Costs of Inefficient Bargaining and Financial Distress: Evidence from Corporate Lawsuits," Journal of Financial Economics 35, 1994, 221-248.

3. I. Welch, “Common Flaws in Empirical Capital Structure Research,” 2006, Brown University working paper.

4. H. DeAngelo and R. Roll, “How Stable Are Corporate Capital Structures?” 2011, UCLA working paper.

5. S. Bhagat, B. Bolton, and A. Subramanian, “Manager Characteristics and Capital Structure: Theory and Evidence,” 2012, Journal of Financial and Quantitative Analysis.

6. A. Gomes and G. Phillips, “Why Do Public Firms Issue Private and Public Securities?” 2007, NBER working paper.

7. M.R. Roberts and A. Sufi, “Financial Contracting: A Survey of Empirical Research and Future Directions,” University of Chicago working paper, 2009.

8. I. Strebulaev and B. Yang, “The Mystery of Zero-leverage Firms,” Journal of Financial Economics 109, 1-23, 2013.

E. Corporate Financial Strategy

1. M. Lowry, R. Michaely, and E. Volkova, “Initial Public Offerings: A synthesis of the literature and directions of future research,” 2017, Cornell University.

2. A.P Ljungqvist, “IPO Underpricing,” Handbook in Corporate Finance, 2004. IPO.ppt

3. R. Aggarwal, S. Bhagat and S. Rangan, “The Impact of Fundamentals on IPO Valuation ,” Financial Management, 2009, v 38, 253-284,. IPO Valuation.ppt

4. F. Degeorge, F. Derrien and K. Womack, “Auctioned IPOs: The U.S. Evidence,” Journal of Financial Economics 98, November 2010, 177-194.

5. K. Hanley and G. Hoberg, “Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings,“ Journal of Financial Economics 103, 2012, 235-254.

6. C.W. Smith, Jr., "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics 15, 1986, 3-30. RaisingCapital.ppt

7. H. DeAngelo, L. DeAngelo, R. M. Stulz, Seasoned equity offerings, market timing, and the corporate lifecycle, Journal of Financial Economics 95, 275-295, 2010.

8. W. Kerr and R. Nanda, “Financing Innovation,” Harvard University working paper, 2014.

9. A. Robb and D. Robinson, “The Capital Structure Decisions of New Firms,” Review of Financial Studies 27, 2014.

10. E. Scott, P. Shu, and R. Lubynsky, “Are Better Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation,” Harvard University working paper, 2015.

11. R. Nanda and M. Rhodes-Kropf, “Investment Cycles and Startup Innovation,” Harvard University working paper, 2011.

12. E. Mollick and R. Nanda, “Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts,” Harvard University working paper, 2015.

13. E. Mollick and V. Kuppuswamy, “After the Campaign: Outcomes of Crowdfunding,” University of Pennsylvania working paper, 2014.

14. Hildebrand, Thomas and Puri, Manju and Rocholl, Jörg, Adverse Incentives in Crowdfunding (October 06, 2014). Duke University working paper.

F. Venture Financing

1. S. N. Kaplan and P. Stromberg, "Venture Capitalists as Principals: Contracting, Screening, and Monitoring," 2001, American Economic Review, v91 (2,May), 426-430.

2. S.N. Kaplan and Per Stromberg. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," Review of Economic Studies, 2003, v70 (2,Apr), 281-315.

VC-Contracting.ppt

3. U. Ozmela, D. T. Robinson, T. E. Stuart, Strategic alliances, venture capital, and exit decisions in early stage high-tech firms, Journal of Financial Economics, Volume 107, March 2013, Pages 655–670

4. O. Bengtsson and B. A. Sensoy, “Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts,” Ohio State University working paper, 2009.

5. O. Bengtsson and B. A. Sensoy, “Investor Abilities and Financial Contracting: Evidence from Venture Capital,” Ohio State University working paper, 2009.

6. Brian Broughmana and Jesse Fried, “Renegotiation of cash flow rights in the sale of VC-backed firms,” Journal of Financial Economics 95, Issue 3, March 2010, Pages 384-399.

7. Hochberg, Y. V., A. Ljungqvist and Y. Lu, “Networking as a Barrier to Entry and the Competitive Supply of Venture Capital,” Journal of Finance, 2010, v65 (June), 829-859.

G. Corporate Investment Policy

1. Panousi, Vasia and Dimitris Papanikolaou. "Investment, Idiosyncratic Risk, And Ownership," Journal of Finance, 2012, v67(3), 1113-1148.

2. S. Alnahedh, S. Bhagat and I. Obreja, “Employment, Corporate Investment and Cash Flow Uncertainty,” 2017, Journal of Financial & Quantitative Analysis,



3. G. Bellstam, S. Bhagat, and J.A. Cookson, “A Text-Based Analysis of Corporate Innovation, 2017.



4. S. Bhagat and I. Welch, "Corporate R&D Investment: International Comparisons," Journal of Accounting & Economics 19, 1995, 443-470.

5. S. Bhagat, N. Moyen and I. Suh, “Investment and Internal Funds of Distressed Firms,” 2005, Journal of Corporate Finance, v11, 449-472.

6. Ran Duchina, Denis Sosyurab, The politics of government investment, Journal of Financial Economics, Volume 106, October 2012, Pages 24–48

7. A. Dunev, R. Morck, and B. Yeung, “Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation,” 2004, Journal of Finance 59, 65-106.

8. M. Amram and N. Kulatilaka, 1999, Real Options, Harvard Business School Press.

9. S. Bhagat, “Real Options in the Telecommunications Industry,” in Real Options: The New Investment Theory and its Implications for Telecommunications Economics (1999), Kluwer Academic Publishers, Boston, MA.

H. Financial Crisis

1. L. Zingales, “Does Finance Benefit Society?” Journal of Finance 70, 2015.

2. Yale University Symposium, “Future of Financial Regulation,” 2009.

3. K. French et al, The Squam Lake Report, 2010, Princeton University Press.

4. T. D. Nadaulda, S. M. Sherlund, The impact of securitization on the expansion of subprime credit, Journal of Financial Economics, Volume 107, Issue 2, February 2013, Pages 454–476

5. M. Carey, A. K Kashyap, R. Rajan, R. M. Stulz, Market institutions, financial market risks, and the financial crisis, Journal of Financial Economics 104, June 2012, Pages 421–424.

6. R. Duchin, O. Ozbas, B. A. Sensoy, Costly external finance, corporate investment, and the subprime mortgage credit crisis, Journal of Financial Economics 97, 418-435, 2010.

7. M. Campello, J. R. Graham, C. R. Harvey, The real effects of financial constraints: Evidence from a financial crisis, Journal of Financial Economics 97, 470-487, 2010.

8. A.N. Berger and C. H. Bouwman, “How Does Capital Affect Bank Performance During Financial Crisis,” Journal of Financial Economics 109, 2013, 146-176.

9. S. Bhagat, B. Bolton, and J. Lu, “Size, Leverage, and Risk-taking of Financial Institutions,” Journal of Banking and Finance, 2015.

10. Admati, Anat R., The Compelling Case for Stronger and More Effective Leverage Regulation in Banking (September 30, 2014). Journal of Legal Studies, Forthcoming; Stanford University Graduate School of Business Research Paper No. 3030. Available at SSRN:

11. Admati, Anat R. and DeMarzo, Peter M. and Hellwig, Martin F. and Pfleiderer, Paul C., Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive (October 22, 2013). Max Planck Institute for Research on Collective Goods 2013/23; Rock Center for Corporate Governance at Stanford University Working Paper No. 161; Stanford University Graduate School of Business Research Paper No. 13-7. Available at SSRN: or

12. S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” Journal of Corporate Finance, 2014. IBCompensation

13. A. Kashyap, J. Stein, and S. Hanson, An Analysis of the Impact of Substantially Heightened Capital Requirements on Large Financial Institutions, Harvard University paper, 2010.

14. S. Alnahedh and S. Bhagat, 2017, " Shadow Banking Concerns: The Case of Money Market Funds.”



15. T. Begley, A. Purnanandam, “Strategic Under-Reporting of Bank Risk,” University of Michigan paper, 2015.

16. S. Bhagat “Yes, Virginia, Austerity Works,”

EuropeanCrisis

I. Leveraged Buyouts and Private Equity

1. Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity” Journal of Economic Perspectives, 2009, v23(1), 121-146.

2. Steven J. Davis , John Haltiwanger , Ron S. Jarmin , Josh Lerner and Javier Miranda, “Private Equity and Employment,” US Census Bureau Center for Economic Studies Paper No. CES-WP-08-07R, 2014. Private Equity

3. Paul Gompers, Steven N. Kaplan and Vladimir Mukharlyamov, “What Do Private Equity Firms Do?” Journal of Financial Economics 121, Issue 3, September 2016, Pages 449-476, .

4. Paglia, John and Harjoto, Maretno Agus, The Effects of Private Equity and Venture Capital on Sales and Employment Growth in Small and Medium Sized Businesses (June 5, 2014). Journal of Banking and Finance, Vol. 47, pp. 177-197, 2014.

5. J. Haltiwanger, R. Jarmin, J. Miranda, “Who Creates Jobs?” Review of Economics and Statistics 95, May 2013, 347-361.

IV. Course Schedule

August 30: Organization and Background

September 6: Mergers and Takeovers

September 13: Mergers and Takeovers

September 20: Mergers & Takeovers

September 27: Mergers & Takeovers

October 4: Corporate Restructuring

October 5: Corporate Governance

October 11: Corporate Governance

October 18: Management Compensation

October 25: Management Compensation

November 1: Capital Structure

November 8: Corporate Financial Strategy

November 15: Corporate Financial Strategy

November 22: Fall Break

November 29: Investment Policy

December 6: Financial Crisis

December 13: Financial Crisis

V. Course Policies

The grade breakdown is as follows:

Item Weight

A. Class Presentations of Papers in Syllabus 45%

B. Peer Evaluation 10%

C. Final Exam 45%

A. Each student will be assigned a set of papers to present in class. Each student will make three hour-long presentations during the semester.

C. The exam will consist of essay-type questions, and will be closed-book, closed-notes, and in-class. The exam will be based on study questions that will be handed out during the semester. The exam will be graded anonymously in the sense that students will not write their names on the exam and at the time I grade the exam I will not know whose exam it is.

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The Reason Investors Love Spinoffs: Juicier Returns

Spun-off companies tend to perform better than the broader market and—often—than their former parent

PayPal’s share-price performance has bested that of eBay by more than 30 percentage points, including dividends, since the payment firm’s July 2015 spinoff. 

By 

Miriam Gottfried and

 

Thomas Gryta

Oct. 10, 2017 8:16 p.m. ET

13 COMMENTS

Among corporate executives, spinoffs of divisions have come in and out of favor over the years, but with one group they have been a steady crowd-pleaser: investors.

Pfizer Inc. PFE -0.05% and Honeywell International Inc. HON -0.40% on Tuesday announced plans to hive off major business units in an effort to sharpen the focus on their core operations.

The moves served as a reminder that even though such activity has slowed, handing businesses to shareholders remains a popular tool as company executives, often besieged by activist investors, find it harder to justify a vast sweep of businesses and pivot toward leaner and more focused operations.

Companies use spinoffs—the act of turning a unit into a separate, publicly traded company by issuing newly created stock—to simplify their operations and shed unrelated businesses while avoiding tax bills that sales of divisions often entail. For investors, the appeal of spinoffs lies in their long history of outperforming the broader market, particularly in the years immediately following separation from a corporate parent.

[pic]

Including dividends, the S&P U.S. Spin-Off Index has outperformed the S&P 500 by nearly 190 percentage points over the past decade. The index is composed of companies with market capitalizations of more than $1 billion that have been separated out within the previous four years. Companies leave the index after that time has passed.

“These companies go from being redheaded stepchild of some conglomerate where they have to go and beg for money to being able to allocate capital as they choose,” said Joe Cornell, founding principal of research firm Spin-Off Advisors LLC.

Spun-off companies also tend to have management teams that are better incentivized, Mr. Cornell said. Hedge-fund and mutual-fund managers would rather invest in a specific business than a collection of businesses, and will assign a higher value to a stand-alone business, he said. Spinoffs can also help the parent company be valued by investors at a higher multiple of earnings.

That helps explain why activists often push companies to break up or spin off one of their divisions. Hedge fund Third Point pressured Honeywell to spin off its aerospace unit in April. On Tuesday, the industrial heavyweight instead said it would cleave off about 20% of its revenue by spinning off its business that makes thermostats for the home and a unit that focuses on automobile turbochargers. Together, analysts estimate the businesses could be worth as much as $10 billion.

Honeywell Chief Executive Darius Adamczyk said in an interview Tuesday that taxes were a key consideration in the decision to pursue the spinoffs. The company is open to acquisition offers for the units, but any price would have to exceed its projection of the spinoff value, he said.

This year, Elliott Management Corp. pushed mining giant BHP PLC to spin off its U.S. oil-and-gas units into a separate publicly traded company. BHP said in August it would seek to unload the unit.

RELATED

• Pfizer Considers a Sale or Spinoff of Its Consumer Healthcare Business

• Honeywell to Spin Off Units Into Two Stand-Alone Companies

• From Philip Morris to Kraft Foods, a Look at Some of Corporate America’s Biggest Spinoffs

Still, such activity has been depressed lately, in part as uncertainty over tax policy and other matters in Washington has put a damper on overall deal numbers. After spinoff volume surged in 2014 and 2015, there have been just 10 such completed deals so far in 2017—on track for the lowest annual level since Dealogic began tracking the data in 1995.

But investors’ eagerness for such moves hasn’t diminished, as the performance of some recent high-profile spinoffs attests. In many cases, they have vastly outperformed the shares of their former parents.

PayPal Holdings Inc.’s share-price performance has bested that of eBay Inc. by more than 30 percentage points, including dividends, since the payment firm’s July 2015 spinoff. Similarly, shares of Zoetis Inc. have outperformed those of Pfizer by nearly 60 percentage points, including dividends, since the maker of pet medications was spun out of the pharmaceutical giant in February 2013.

Pfizer now hopes to hand its shareholders another gift, announcing Tuesday it is exploring a sale or spinoff of its consumer-healthcare business, home to well-known brands such as Advil and ChapStick. Analysts estimate the business could be worth upward of $10 billion. Pfizer said the consumer unit’s value could “be more fully realized outside the company.”

There are notable disappointments among recent spinoffs. Shares of HP Inc., which makes printers and computers, have outperformed Hewlett Packard Enterprise , a provider of IT services, since the latter was spun off in October 2015. The hope was that the spinoff would have room to grow without the profitable, but declining, printer business to weigh it down. Shares of HP Enterprise have risen 56%, including dividends, since then—versus a 68% gain for shares of HP.

Activist investor Jana Partners LLC pushed oil-and-gas services company Oil States International Inc. to spin off Civeo Corp. , a lodging company for oil-field workers, just months before a downturn in energy prices sent Civeo’s shares tumbling in late 2014.

Shares of News Corp , the owner of Wall Street Journal parent company Dow Jones, have underperformed those of 21st Century Fox Inc. —the original parent company—since the two companies split in June 2013.

There are also plenty of examples of companies with a wide scope of operations that continue to prosper, like  Inc. and Berkshire Hathaway Inc.

One group that benefits whether spinoff activity is ebbing or flowing, according to Mr. Cornell of Spin-Off Advisors: the bankers that reap hefty fees from arranging deals.

“You get five years of unbundling, then there’s a lot of merger activity, and bankers start saying ‘hey this asset would make a lot of sense for you.’ ”

—David Benoit 

contributed to this article.

Write to Miriam Gottfried at Miriam.Gottfried@ and Thomas Gryta at thomas.gryta@

Appeared in the October 11, 2017, print edition as 'Companies Chase Spinoff Bump.'



By 

Thomas Gryta and

 

Cara Lombardo

Updated Oct. 10, 2017 12:32 p.m. ET

3 COMMENTS

Honeywell International Inc. HON -0.18% plans to spin off its home and transportation businesses into two new separate companies by the end of next year, a move that gained approval from activist investor Third Point.

The moves are the first efforts to streamline the conglomerate under new Chief Executive Darius Adamczyk, who took the reins in late March. He launched a months long portfolio review looking at all aspects of the company, including whether it should remain whole. The effort received an extra push in late April when Third Point asked Honeywell to spin off its aerospace unit, an idea it ultimately rejected.

The Morris Plains, N.J., company said Tuesday that the new homes and ADI Global Distribution business, which will include residential thermostats and security and fire-protection products, would generate annual revenue of $4.5 billion. The transportation business, a portion of the company’s current aerospace unit that primarily serves the auto industry, would focus on turbocharger technologies and generate annual revenue of $3 billion.

The entire company generated $39 billion of revenue last year.

In a call with analysts Tuesday, Mr. Adamczyk said Honeywell “will focus on fewer markets and verticals,” shifting away from consumer and distribution segments. “My goal was to scrutinize and assess each business unit to derive a portfolio best capable of maximizing shareholder value over the long term,” he said.

Third Point said it was pleased with Honeywell’s review and narrowed focus. “We are supportive of CEO Darius Adamczyk’s leadership and confident that his commitment to continuous portfolio optimization will further improve shareholder value,” the activist investor said.

Honeywell had a string of success under previous CEO Dave Cote, who turned the company around and boosted its market value fivefold during his 14-year tenure. His expansion through acquisitions produced a conglomerate that makes everything from jet engines to thermostats to rubber boots. Mr. Cote remains Honeywell’s chairman through April.

Mr. Adamczyk has stressed that the conglomerate structure has worked well for Honeywell, even as companies are under pressure to focus on core competencies.

Also helping the resistance to breaking up the company: Honeywell shares are up 24% so far this year. They were up less than 0.1% Tuesday at $143.73.

In retaining the aerospace business, the company highlighted the attraction of the sector in general and the fact that it benefits from other Honeywell operations. It also brings a “significant proportion of U.S.-based cash flows” for Honeywell, which has much of its cash overseas.

Nicholas Heymann, an analyst with William Blair & Co., said the remaining portfolio is “relatively high-growth businesses with six key end-markets” that will use Honeywell’s customers to produce more organic revenue. Deutsche Bank analyst John Inch said the moves put Honeywell on “an upward growth trajectory from a smaller revenue base” and leave it with billions in capital to fund future expansion.

The company said it could spend up to $10 billion in overseas acquisitions in 2018, while using another $5 billion for U.S. deals, share buybacks and debt repayment. If U.S. tax reform is passed, the company expects it could use the entire $15 billion anywhere.

Honeywell on Tuesday raised the low end of its full year earnings per share guidance by 5 cents to a range of $7.05 to $7.10. The company, which is scheduled to report its third-quarter financial results Oct. 20, said it expects earnings of $1.75 a share on sales of $10.1 billion in its latest quarter, up 3% from a year ago.

Honeywell expects the separations, which won’t require a shareholder vote, to be complete by the end of 2018 and be tax-free to its shareholders. The new homes business will have about 13,000 employees, while the transportation business will have about 6,500.

Honeywell on Tuesday said Gary Michel will take over as president and CEO of its home and building technologies strategic business group. Mr. Michel, who previously was a president at Ingersoll-Rand PLC, will report to Mr. Adamczyk.

He replaces Terrence Hahn, who is moving to a leadership role to help prepare the homes and ADI business to be spun off.

—David Benoit contributed to this article

Write to Thomas Gryta at thomas.gryta@ and Cara Lombardo at cara.lombardo@

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By LIZ HOFFMAN

Updated Sept. 28, 2015 9:50 p.m. ET[pic]

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