Spinoff City: More Companies Should Shed Subsidiaries, Says Goldman

Divesting noncore units is a good way to boost lagging profit margins, the firm declares.

Activist investors regularly demand that companies spin off a subsidiary, arguing that shareholders will be better served without the one dragging down the other. That, for instance, is what Alta Fox Capital Management wants toymaker Hasbro to do with its Wizards of the Coast and Digital Gaming unit (one title: Dungeons & Dragons).

But to Goldman Sachs, more companies should themselves decide to part ways with noncore subsidiaries, rather than have the likes of Alta Fox mount a proxy fight to force them into a spinoff.

That’s particularly true for businesses with lower-end profit margins on the order of 5% to 10%, plus expected revenue growth of just 10%, Goldman argued in a research note. Almost half the companies in the S&P 500 fit that description, the investment house observed.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

By saying goodbye to divisions that aren’t core, such a parent company could double its valuation, the report contended. The Wall Street firm dryly dubbed the notion “self-activism.”

Goldman highlighted 46 companies, with margins trailing their sector peers, which it said would benefit from jettisoning a subsidiary—via a spinoff or perhaps by selling it to one of the special purposes acquisition companies, aka SPACs, hungry for a merger target. Prominent on Goldman’s list were oil giant ExxonMobil, retailer Best Buy, and medical supplier McKesson.

Another Goldman study, of spinoffs between 1999 and 2020, discovered that the departed unit usually was undervalued by investors and yet ended up outperforming the former parent over the next 12 months.

Boosting margins is not easy to do, which broadens the appeal of a spinoff, in Goldman’s estimation. The research report said “it is arguably a more achievable objective than trying to lift sales growth at the same time as US economic growth decelerates.”

Spinoff deal counts were the highest last year, through Nov. 15, since 2011, according to Bloomberg Law, with a 205 tally. This report concluded that “pressure from shareholder activists has played a role in some of these decisions to carve up conglomerates.” 

Big names are involved. General Electric plans to divest its health care unit next year and its energy operation in 2024. This maneuver would let GE devote itself to aviation. By the same token, Johnson & Johnson intends to shed its consumer products business, allowing it to focus on pharma.

Overall, spinoffs have been successful as standalone public companies, by the count of the S&P US Spin-Off Index. Over the past 10 years, this index has returned 11.7% annually, just a little less than the broad-market S&P 500’s 14.4%. But such happy news is far from guaranteed.

This rocky year, the spinoff index is down 5.9%, which at least is better than the S&P 500’s 8.8% loss. Last year was better, with a 12.1% showing, although that was slightly less than half what the S&P benchmark logged.

Related Stories:

Will Allocators Ever Embrace Liquid Alts?

Get Ready for a Biotech M&A Comeback

Buyout Deadlines: Hundreds of SPACs Face Shutdowns if They Can’t Deliver

Tags: , , , , , , ,

NY Pension Calls on Firms to Report Abuse, Harassment, Discrimination

Tesla, Starbucks, and Activision Blizzard have been targeted by the $279.7 billion New York State Common Retirement Fund.



The New York State Common Retirement Fund has filed shareholder proposals with portfolio companies Tesla, Starbucks, and Activision Blizzard, asking them to report how they are working to prevent abuse, sexual harassment, and racial discrimination in the workplace, while calling each one out on recent examples of alleged illegal or improper behavior.

The pension fund’s proposals for each company are similar in language, as they each request the companies publish an annual report that describes and quantifies their efforts to “prevent harassment and discrimination against protected classes of employees,” including sexual harassment and racial discrimination. However, in its proposal for Activision Blizzard the fund also added the word “abuse.”

The proposals cited specific concerns the pension fund has with each company. For example, its Activision Blizzard proposal mentioned an investigation into the video game company by the California Department of Fair Employment and Housing, which it said resulted in a lawsuit alleging discrimination, retaliation, and unequal pay. It said the Fair Employment and Housing Department estimates the firm’s total liability to be more than $930.3 million to 2,500 allegedly injured employees.

“For years, there have been alarming news reports that detail allegedly rampant sexual abuse, discrimination, harassment, and retaliation directed toward female employees,” the proposal said.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

In the pension fund’s proposal with Tesla, it noted that there have been “numerous news reports and allegations of gender and race discrimination, harassment and retaliation” at the electric vehicle maker. It cited a $137 million jury verdict in October, including $130 million in punitive damages, against Tesla for its “racially hostile” work environment.

“It has been reported that most Tesla workers are currently bound by mandatory arbitration agreements,” the proposal said, “so, consequently, there is little transparency into the extent of workforce mismanagement.”

And in its proposal to Starbucks, the pension fund cited “recently resolved allegations” made by the Equal Employment Opportunity Commission concerning alleged racial bias in the promotion of its employees.

“There have also been multiple media reports of allegations and lawsuits claiming that the company failed to protect employees from discrimination and harassment,” the proposal said.

The proposals ask the companies to disclose:

  • The total number and aggregate dollar amount of disputes settled by the company related to sexual abuse or harassment or discrimination based on race, religion, sex, national origin, age, disability, gender identity, or sexual orientation; and
  • The average length of time it takes to resolve harassment complaints, and the total number of pending harassment or discrimination complaints the company is trying to resolve internally or through litigation.

“No one should be subjected to sexual harassment, racial discrimination or bias in the workplace,” New York State Comptroller Thomas DiNapoli said in a statement. “When companies turn a blind eye to abuse by their executives, managers, employees, and customers, they perpetuate the harm and put investors at risk. These three companies have all had sexual harassment or racial discrimination controversies, and we are seeking a full accounting of what they are doing to stop these abhorrent behaviors and what it’s costing the companies.”

In addition to the shareholder proposals, DiNapoli, who is also the trustee of the $279.7 billion state pension fund, has asked streaming music service Spotify for details about the effectiveness of its new content rules, citing complaints about controversial podcast host Joe Rogan, according to Reuters.

DiNapoli, who oversees funds that own shares of Spotify owner Spotify Technology, sent a letter sent to Spotify CEO Daniel Ek, citing complaints about Rogan spreading COVID-19 vaccine misinformation, according to Reuters. The letter also called on Spotify to give users an easy way to report content that is in potential violation of its rules, and to define how its board oversees content risks and enforcement.

DiNapoli also mentioned reports of other COVID-19 misinformation, as well as racist and antisemitic material in Spotify-hosted content.

“As we have seen with other technology and media companies that host or publish content, the failure to successfully moderate content on a company’s platforms can lead to various reputational, regulatory, legal, and financial risks,” DiNapoli wrote, according to Reuters.

Related Stories:

New York Demands Political Disclosure From Twitter, Six Other Companies

Record Returns Spur NY to Cut Assumed Return Rate to Below 6%

NY State Pension Fund Scrutinizes Shale Oil, Gas Companies

Tags: , , , , , , , , ,

«