STRATEGIC REPOSITIONING AND CORPORATE VALUE

Corporate value can often be enhanced through strategic repositioning initiatives including focused spinouts, business repackaging or redefinition, and corporate redirection.

• Focused spinouts are popular, particularly as public companies, because diversified companies generally get valued at lower multiples than focused companies. Additionally, in large corporations, spinouts can create a more favorable environment for management to focus attention on the business.

Spinouts have been creating additional value for many years. Our experience with spinouts began with Syntex Corporation’s spinouts of Alza (drug delivery) and Zoecon (insect control) as separate public companies in the 1960’s.

Thermo Electron Corporation used spinouts as a strategic corporate development practice for many years and achieved much higher market valuations than it likely would have as a diversified company.

The spinout will often capitalize in the market at a value much greater than it appeared to have within the parent corporation. Spinouts have often increased total corporate value by 30-100% by spinning out 15-25% of earnings or assets.

• Repackaging or redefinition can often be done by relatively simple remarketing which changes perceptions of the company or business, and therefore changes its value.

Several years ago, we participated in the leveraged buyout of a pipe manufacturing company at a P/E of about 5x, typical for pipe companies at the time. We changed the market perception of the company from a “pipe” company to a “composites” company and quickly attracted an acquisition bid at a P/E of 15x, which was typical for “composites” companies at the time. Thus, the company’s value had tripled based on repackaging or redefinition of the business accomplished by straightforward marketing.

An even more spectacular example of repackaging occurred recently in the repositioning of Watkins- Johnson Co. In 1999, Watkins-Johnson was bought by Fox Paine & Co. for $330 million ($282 million of that borrowed). Then, only eight months later, the old company’s business of supplying wireless equipment to telecommunications companies, repackaged as WJ Communications Inc., achieved a $2.4 billion market cap in an August 18, 2000 IPO. The same asset, repackaged and marketed in a different way, was worth a lot more - giving Fox Paine a value gain of more than 20 times on its equity investment in only eight months.

• Redirection means emphasizing a changed business direction because of explicit recognition of changes in corporate opportunity due to competitive circumstances, business changes, or strategic planning insights.

The success of General Electric Corporation over the last 20 years is largely the result of strategic redirection under Jack Welch’s leadership. Welch implemented a directive that all GE businesses would have to be no. 1 or no. 2 in market share or be exited. This was a redirection away from weakness toward strength, and achieved dramatic profit and market value improvement. GE used all the corporate development methods - divestitures, acquisitions, and internal business growth - to achieve its objectives.

Most corporations, especially large multi-business companies, usually have several latent, undeveloped opportunities for strategic repositioning initiatives that have potential to increase corporate value significantly. Conscious and opportunistic strategic and corporate development planning can develop effective action programs to unlock and realize these values.

Richard Bird
December 2000

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