Are Company Spin-Offs the Only Way to Maximize Shareholder Value?

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By Jacob Maslow


Thanks to the increasingly vocal rise of activist shareholders like Carl Icahn and Starboard Ventures, it’s easy to get a distorted view of maximizing shareholder value. If you study the typical game plan of activist shareholders like Carl Icahn, it’s tempting to think that shareholder activism is a one-trick pony. In fact, it can easily be broken down into a few steps. First, you buy a decent chunk of stock in a company that is not doing well. Second, you put pressure on the board to spin off unrelated businesses that the company has or agitate the company to sell itself to a larger competitor with deep pockets. The whole idea behind shareholder activism is that there’s a lot of locked value in shares of companies that are essentially mismanaged.

The problem with this type of thinking is that it’s not looking at the long-term game plan. In many cases, companies are struggling because they are going through a transition. This doesn’t necessarily mean that they are down for the count. In many cases—IBM (NYSE:IBM) is the first that comes to mind—they need to go through some pain before they come at the end of the tunnel. When they come out at the other side, they rise like a phoenix. After a decade or two, the company then faces another rough spot because of its industry trends and goes through some pain again. If you throw into the mix an activist shareholder that points to the low stock prices and says, “Well, the company has to sell itself or the company has to do some drastic,” it throws the whole transition evolutionary process off track. This is really too bad.

There are some companies that are worth waiting for as they transition. Yahoo (NASDAQ:YHOO) is actually a great company, thanks to its brilliant CEO Marissa Mayer. You might not think that Marissa Mayer is not doing a good job because of all the criticism leveled at here; however, if you look past the hate and pay attention to what Yahoo is doing on the ground as far as its mobile game and search strategy are concerned, it’s making some serious progress. Of course, it remains to be seen whether Marissa Mayer could build on these positive developments and make Yahoo’s profitability break out; however, it’s a bad idea to count Yahoo out. It has the money, the infrastructure, and the talent base to undergo a successful transition.

Put it this way: Why don’t activist shareholders try to break up a large company like 3M(NYSE:MMM) ? Give up? Simple. 3M is highly profitable. Activist shareholders only look for weak companies that may be going through transition for a quick return. While shareholder activism may work in certain situations and contexts, it is definitely not an across the board solution.

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