If you want to create value, sometimes you have to split yourself up into understandable parts and let the chips fall.
We've been huge fans of the "breaking up is easy to do" school of thought, and while there are always companies eager just to shed poorly performing divisions -- here I am thinking of Halyard Health (HYH) being spun off by Kimberly Clark (KMB) at the top of its earnings power -- most of the time managements want to unlock value by making a multidivision company into companies that are easier to understand. (Halyard is part of TheStreet's Action Alerts PLUS portfolio.)
Today we got terrific news from two companies that are determined to bring out value: Baxter (BAX) and RR Donnelley (RRD). For ages, we have been pushing Baxter to split up -- it's even part of a chapter in Get Rich Carefully -- into a slower-growing methodical device company and a fast-ramping biosciences company. About 18 months ago, the Baxter board agreed, and then just at the beginning of June, Baxter gave you a special dividend called Baxalta (BXLT) made up of some dominant blood franchise drugs, including the best compound for hemophilia. Baxter shrewdly kept back a little less than 20% of the new company, in part because the thing's so darned cheap and so good that I think they just wanted to keep a chit in the game.
You got your Baxalta on July 1 and we praised the breakup as a terrific way to get exposure to a well-run albeit niche business. Someone was listening. This morning Shire (SHPG), a very aggressive pharmaceutical company, launched a hostile takeover of Baxalta, coveting the company's rare-disease medicines. The $45.23-a-share bid, at an amazing 36%, sent Baxalta into the stratosphere immediately, although it cooled later on because Baxalta has the tools to fend off the offer. That said, it makes a ton of sense for Shire to pursue it even at a higher price because Shire has a very favorable overseas tax status and can immediately boost its earnings if the deal does close. You would be up 18% from when the spinoff occurred if the deal gets done.
RR Donnelley, the printing company we have so heartily embraced on Mad Money, knocked our socks off today with a decision to split into three companies, all of which make a ton of sense and didn't belong under one roof.
Tom Quinlan, a remarkable CEO, is giving you a financial communications services company, a customized multichannel communications management company and a printing services business.
The company before this new configuration seemed like a confusing mosaic. I like the financial communications business because Donnelley's got a hammerlock on financial communications of public companies. Its multichannel management business can cash in on the rage for brick-and-mortar retailers to go expand into e-commerce.
The most exciting division, though, will be its print services business, which I think can continue to consolidate an industry that prints catalogs and periodicals. Now, I know this business has little growth, but there is ample opportunity for Donnelley to buy other companies in the industry and I think it will do so from the get-go. Consider it Baxalta buying other blood franchise companies rather than being acquired by Shire.
I salute both management teams for recognizing the need to create easy-to-understand structures that immediately unlock value. They are a lesson to other managements that breaking up is both easy and very lucrative, almost immediately, to do.
