News & Press
The Edge Group’s Jim Osman on Alibaba Spinoff Investment Opportunity
Alibaba Is Laying the Ground for a Breakup. Amazon and Alphabet Should Do the Same.
Alibaba Group Holding is radically shaking itself up, which is sending shares higher. Amazon.com and Alphabet , Google’s parent, may want to take note of the plan and the stock’s reaction.
Tuesday, the Chinese internet company unveiled a new organization structure. The company is arranging itself into six business units, each with an independent board of directors and CEO. The six include cloud intelligence; internet retail; mapping; transactions; logistics; and digital media, including Alibaba Pictures.
Alibaba “gives a boost and positive signal to other big tech companies that they can also explore and consider breakup of their segments to create value,” said Jim Osman, founder of The Edge Research. The Edge specializes in corporate spinoffs and corporate transactions. “If done successfully, Alibaba would stand as a great example for the conglomerates on value creation,” he told Barron’s.
Osman said that in a breakup scenario, Amazon Web Services and the rest of Amazon together could fetch about $200 in a couple of years. Amazon stock is currently a little below $100 a share and off about 50% from the record level of almost $189 reached in the summer of 2021. Alphabet (GOOGL) is also on Osman’s list of potential breakup candidates. It “faces continual antitrust scrutiny due to its role as a dominant player in the advertising market,” said Osman. He believes the company should consider spinning out YouTube first “to create value for shareholders and avoid unnecessary antitrust attention.”
Bloomberg – Alibaba Breakup Shows Global Tech Giants a Way to Unlock Value
A plan to split Alibaba Group Holding Ltd. into six units sent the company’s stock soaring Tuesday while introducing a potential model for global tech giants facing mounting breakup pressures.
In addition, US tech giants like Meta Platforms Inc. and Amazon.com Inc. could be ripe for breakups due to privacy concerns and to unlock value in stock prices that are well off all-time highs, according to Jim Osman, founder of special situations research firm The Edge Consulting Group.
“This has changed the environment for looking at these big tech names that have been under pressure to do this,” he said. If Amazon separates its cloud and subscription services units, the company could deliver a breakup value that’s 70% above its current share price, Osman said. Meta’s WhatsApp and Instagram businesses are also not being valued appropriately, he said.
Why Every Good Stock Market Investor Needs A Breakup
Divorces, as anyone who has been through one (and I haven’t) will tell you, are expensive. Ask Jeff Bezos. In 2019, Jeff and MacKenzie finalized their separation, which, at roughly $160 billion, set a financial world record that will be difficult to beat. Were they better staying together or are they freed up to realize their real true potential apart? Time will tell, I guess.
The structure of human relationships and breakups is something I’m not really an expert on. However, what I have done for over 17 years is to examine corporate divorces – when companies go through a separation of businesses and, more specifically, figure out whether the entities are better off together or not. If not, where is the real value and how can an investor capitalize on the opportunity? Call me the best company divorce lawyer in town if you like, but analyzing these regular key events is something you should consider as an investor as these “Special Situations” can create enormous wealth for you if analyzed correctly.
Corporate breakups, more commonly known as Spinoffs, demergers, or divestitures, are the equivalent of a divorce as we know it, but on the company side. A stock Spinoff is a corporate action whereby a company separates a portion of its business into a new independent company and distributes shares of the new company to its existing shareholders. This is usually done to unlock the value of the business unit, allow it to operate more independently, or to focus on the core business.
Arconic Stock’s Rally Might Just Be Getting Started
Arconic Corp. (ARNC) investors got a pleasant jolt this past week after The Wall Street Journal reported the aluminum products company was in talks to be acquired by private-equity firm Apollo Global Management (APO). Despite a big gain, the stock still looks like a buy.
The Journal reported Apollo (ticker: APO) submitted a bid in February at a “significant premium” to recent levels. Apollo didn’t respond to a request for comment, while an Arconic spokesperson said the company doesn’t comment on rumor or speculation. But many takeout offers start at about a 20% premium to a stock’s 30-day moving average which implies a price for Arconic (ARNC) of around $28 a share. It makes sense, then, that shares would jump about 30% off Tuesday’s lows and close at $27.20 on Friday.
What’s surprising is that there may be more gains ahead. “There is more upside beyond the price attributed based on the talks with Apollo,” says Jim Osman, founder of the Edge, a firm that specializes in research about spinoffs and special situations. He identified Arconic as a potential takeout candidate in a February 2023 report.
Greater Returns Come From Buying Companies, Not Markets.
One of the most common questions I have been asked in my 33 years of being involved in finance is, “what do you think of the market?” Basically, this translates into, “should I buy now?” Humans have a natural inclination to own things for a variety of reasons, including status and achievement, a sense of security, control and independence, emotional attachment, and self-expression. These reasons help explain why people enjoy owning things and why owning things can be a source of satisfaction and happiness.
Predicting the stock market is a challenge many investors face as stock prices can be influenced by a wide range of factors, including economic indicators, company-specific events, and market sentiment. The trouble is that the stock market as a whole also goes down and can stay down for lengths of time. This can be very tough for some to understand and those people end up throwing in the towel.
Determine the start of a move-up in the stock market and whatever you own will rise. A rising tide lifts all boats. Or does it, and should you be even thinking about market direction?
Bloomberg – Western Digital Share Sale Signals Spinoff Progress
Western Digital Corp. appears closer to spinning off its flash business after disclosing new details about financing and its strategic review.
Earlier this week, the firm detailed a $900 million sale of convertible preferred stock to investors including Apollo Global Management Inc. and Elliott Investment Management. The disclosure provides investors greater insight into a potential transaction after Bloomberg reported that the spun-off unit may merge with Kioxia Holdings Corp. to create a publicly traded company in the US.
Selling preferred shares enabled the company to secure an influx of cash without an immediate shakeup to its financial profile, said Jim Osman, founder of The Edge Consulting Group. “Raising capital through the preferred stock route would not only provide liquidity but also ensure that there is no immediate dilution to ownership, nor is the company highly levered by raising capital in the form of additional debt,” he said in an interview. “However, deal talks are still in the early stage, and they must overcome regulatory hurdles to complete the merger.”
Bloomberg – J&J’s Kenvue IPO Sets Up Future Tax-Free Distribution
Johnson & Johnson’s decision to hold a traditional IPO for its consumer health unit raised some eyebrows on Wall Street due to the moribund new issues market, but analysts say it makes sense when viewed as part of a two-step process. Shares of J&J are down 2.5% since the company filed for an initial public offering of Kenvue Inc. on Jan. 4 after the market closed. The announcement was welcome news for New York’s IPO market, which is coming off its lightest year in decades partly due to a preference for tax-free separations by companies navigating the impact of macroeconomic headwinds.
An IPO will enable J&J to get the highest possible price while it also plans a future tax-free distribution of its remaining shares, analysts at The Edge Consulting Group wrote in a note to clients.
Traders have punished traditional IPOs during the past year’s stock-market selloff, forcing most candidates to wait for lower volatility and a more certain interest-rate outlook. Just five IPOs raised more than $500 million apiece in the past 12 months, and four of those stocks trade below their offering prices. Spinoffs, on the other hand, have outperformed. The Bloomberg US Spin-Off Index is down 7.8% over the past year compared with a 17% decline in the S&P 500.
The Wall Street Journal – GE’s Spinoff Deserves Healthy Skepticism
Healthcare spinoffs are everywhere you look these days. Just in the first week of January, Johnson & Johnson’s consumer unit Kenvue officially filed for an initial public offering, GE’s newly spun-off healthcare unit started trading and Baxter announced plans to spin off its kidney care unit. Swiss giant Novartis, meanwhile, is working on spinning off its generic Sandoz business.
Generally speaking, spinoffs are usually an attractive way to drive shareholder return. First of all, they are tax-efficient. But more important, they allow the parent company to reduce complexity where size in and of itself confers no strategic advantage. Meanwhile, the newly established company gains autonomy to make better decisions. That is the idea with newly listed GE HealthCare Technologies, whose management is arguing that a more nimble company will make faster and better decisions.
But it is hard to get excited about the company’s valuation. The newly listed shares closed at $58.95 on Friday, at the higher end of Morgan Stanley analysts’ valuation range of $52-$59. The Edge Group, a research firm focused on special situations, has a target of $54.52 for the stock, reflecting an enterprise value of 12.7 times forecast 2024 earnings before interest and tax—a discount to peer Siemens Healthineers.
Bloomberg – Spinoffs Heat Up as Companies Seek IPO Alternatives
Slow going in the IPO market is fostering an unusually packed calendar of tax-free spinoffs as companies seek to boost value by floating parts of their business. Fortune Brands Home & Security Inc. climbed 1.5% on Tuesday after its board of directors approved the spinoff of its cabinets business. It’s just the latest in a busy stretch for separations that give stockholders shares in a new publicly traded entity without triggering a tax event.
Parent companies often choose segments for spinoffs because they feel they’re being underappreciated by the market. The transactions are a useful tool to unlock value as market conditions hinder alternatives like initial public offerings. Spinoffs currently on the calendar are near an all-time high with close to 40 transactions in progress, according to Jonathan Morgan, lead deals analyst at The Edge Consulting Group.
“Companies are looking to create value in some form or fashion in this market,” he said at a special situations conference last week. “They’re not doing it through the traditional way of an IPO. Companies in this market aren’t going to be willing to sell any of their segments at this time. ‘SPAC’ is such a dirty word that it’s not happening anymore. The fourth option, whether they like it or not, is to announce a spinoff.”