Are More Big Spin-Offs and Break-Ups Imminent? (ITT, MRO, FO, GE, MMM, UTX, HON, DHR, DOV, TXT, OTTR, BRK-B)

The reaction to the news of a conglomerate break-up in a three-way separation was incredible for ITT Corporation (NYSE: ITT) yesterday.  Shares closed up 16.5% rather than over 20% and the closing price was $61.50.  We thought that maybe all of the good news was being priced in even having received the analyst notes from Gabelli & Co. with a “buy” rating and an $89.00 target (with new $90 value this morning).

Now we have a break-up into two happening from Marathon Oil Corporation (NYSE: MRO).  Marathon is far from a conglomerate, but its split into two for its exploration activities and its refining activities follows the same path as ITT.  Fortune Brands Inc. (NYSE: FO) gained 15% after its late-2010 break-up announcement. We can’t help but wonder if other conglomerates and quasi-conglomerates might consider similar strategies.  That leads to reviews of General Electric Co. (NYSE: GE), United Technologies Corp. (NYSE: UTX), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON), Danaher Corp. (NYSE: DHR), Dover Corp. (NYSE: DOV), Textron Inc. (NYSE: TXT), and even a small company called Otter Tail Corporation (NASDAQ: OTTR). Lastly, what about  Berkshire Hathaway Inc. (NYSE: BRK-B)?

There is always the ongoing call for General Electric Co. (NYSE: GE) to break itself up.  GE is very unlikely to break itself up, but it is always making changes or considering changes as it seeks a long-term goal of 20% return on capital.  GE’s portfolio appears to be on the path to ultimately be ex-NBC Universal.  At one point before the recession, GE was going to spin-off its lighting and appliances operations but we all know the economy got in the way there.  CEO Jeff Immelt has recently said that he is happier than ever with the GE portfolio.  We won’t hold any illusions that GE is considering a break-up of the empire that took more than a century to build.  If GE didn’t want to break itself up to unlock value when shares were in the high $30’s, it chances of a break-up when shares are under $20 would fall into the category of “Slim to none, and Slim left town.”  But what about others?

United Technologies Corp. (NYSE: UTX) is worth more than $73 billion and shares just hit a 52-week high of $79.90 Wednesday.  This is also within striking distance of all-time highs from 2007.  If UTC wanted to split off operations it could at any time.  Operations include Otis in elevators, United Carrier in HVAC, UTC Fire & Security, Pratt & Whitney in engines, Hamilton Sundstrand in aerospace, and Sikorsky in helicopters.  Don’t hold your breath for a break-up here.

3M Co. (NYSE: MMM) has been considered  stuck in the mud and at $88.66 its 52-week range is $68.96 to $91.49 with a market cap of more than $63 billion.  3M operates in operates in industrial and transportation, Healthcare, Consumer and Office products, Safety Security and Protection, Display and Graphics, and in Electronics and Communications.  3M has proved to be an acquirer rather than a seller through time.

Honeywell International Inc. (NYSE: HON) is always an interesting situation since it was booted out of the Dow Jones Industrial Average.  Shares hit a new 52-week high of $54.90 Wednesday and the market cap is approaching $43 billion.  Operational units are broken down into Aerospace, Automation and Control Solutions, Transportation Systems, and in Specialty Materials.  We would note that at one point GE was trying to acquire Honeywell but the deal was blocked by the European Union regulators.  There are many operations there that could be perhaps ‘unlocked’ selectively inside the company.  The odds: six-five, pick ’em.

Danaher Corp. (NYSE: DHR) is also very close to all-time highs at $47.10 and its market cap is now just over $30 billion.  It makes professional, medical, industrial, commercial, and consumer products and operates in segments of Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools and Components.  Many carve-out opportunities exist, but the shares being at all-time highs give the company more than enough breathing room.

Dover Corp. (NYSE: DOV) is another that is classified as a conglomerate but its $58.88 price generates an $11 billion market cap.  Dover is within striking distance of its 52-week high, and investors need to know that the 52-week high of $59.82 is also its all-time high.  Dover operates in segments of Industrial Products, Engineered Systems, Fluid Management, and Electronic Technologies.  There are many carve-out opportunities here but with shares close to all-time highs we have little reason to suspect pressure is coming.

Textron Inc. (NYSE: TXT) rose handily by more than 2% Wednesday to $24.92 and it is worth nearly $7 billion in market cap.  The company is into aircraft, defense, industrial, and finance businesses and its business segments are Cessna, Bell, Textron Systems, Industrial, and Finance. If shareholders wanted to press, there is a ‘could-be possibility’ that the share pressure argument could arise.  For whatever it is worth, the consensus analyst target price is roughly $26.05.  The recession was very tough on the company and investors need to know that many defense firms and aerospace firms are reluctant to eject other more stable operations.

On a much smaller scale is a mini-conglomerate that is a mostly unknown ‘general eclectic’ company called Otter Tail Corporation (NASDAQ: OTTR). The company has electric and other operational segments: Electric, Plastics, Manufacturing, Health Services, Food Ingredient Processing, and Other Business Operations.  Otter Tail, at $22.92, has a 52-week high of $24.14 and its market cap is a mere $823 million.  As far as the chances of it making any carve-outs: only if it wants to on its own.

The last one that needs to be at least addressed is Berkshire Hathaway Inc. (NYSE: BRK-B).  The portfolio here has many aspects around what Warren Buffett considers as a “FOREVER” investment.  Buffett won’t ever break up the Berkshire Hathaway empire that he has put together from Insurance to reinsurance, to BNSF in rails, to financial services and financial betting, to housing to retail to NetJets, and on and on.  Only the Buffett successor may decide that many of those smaller companies might be better to unload to focus on a larger more core portfolio.  Still, there is nostalgia and the “touching America every day” aspect that keeps the empire so popular.  Don’t hold your breath for a break-up or a whole series of spin-offs any time soon from Berkshire Hathaway.

Before Motorola became two Motorolas, we gave a review of the big spin-offs and break-ups to watch in 2011.  There are many more under consideration outside of just conglomerates and ‘general eclectic’ amalgamations of unrelated businesses that conduct spin-offs.

Marathon Oil Corporation (NYSE: MRO) is so far enjoying its more focused announcement.  Shares are up almost 9% at $44.13 Thursday morning.

There are many more companies out there that have ‘non-strategic units’ which can be broken apart of that could adopt carve-out strategies.  Getting the companies to “unlock shareholder value” is not always as easy as it seems.  Betting on any imminent announcements is not always the safest bet.  Even in the world of mergers and acquisitions, companies should be considered on their own merits at that particular point in time rather than just as M&A or restructuring candidates.

The calls for break-ups, spin-offs, restructuring and more often come from many angles.  Some companies are inefficient in their current operations.  Value investors often look for special situation opportunities.  Don’t ever forget the power of money: investment bankers love these efforts because it generates more investment banking fees.

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JON C. OGG