NEW YORK Corporate splits divide companies, but they multiply bankers fees.
Kraft's plan to split into two publicly traded companies, announced on Thursday, is the latest in what is shaping up to be the year of the spin-off.
The result will be new, smaller companies, many of which will need to do more deals to stay relevant, driving more business for bankers and lawyers who advise on these deals.
Spin-offs have become popular this year as a weak economy has made it hard for companies to increase revenue and earnings. To maximize value for shareholders, companies are looking to get rid of the units facing greater challenges, hoping the market will value the remaining company higher.
Moreover, investors such as Carl Icahn, Pershing Square's William Ackman and Trian's Nelson Peltz are nudging companies to do so to increase shareholder profits.
Investors have rewarded companies that have announced splits in 2011. An analysis of 10 high-profile spin-offs this year shows shares on average rose nearly 5.5 percent in their first day of trading and tended to go even higher in the month afterward. (r.reuters.com/ver92s)
"This is the natural swing of the pendulum," said a head of mergers and acquisition of a U.S. bank, who spoke on the condition of anonymity. "You've got years of consolidation and mergers, then you have cost-cutting and downsizing the pieces to be streamlined, then you spin them off and create new companies. Then the process starts again."
An analysis of recent breakups shows that nearly every bank on Wall Street is getting a piece of the action, as spinoffs have spanned a range of industries, from energy and defense to technology, and big names such ITT (ITT.N), ConocoPhillips (COP.N), and Expedia (EXPE.O).
Private-label food maker Ralcorp Holdings Inc RAH.N, which said in July it would split itself into two companies to fend off an unwanted, unsolicited takeover bid from ConAgra Foods Inc (CAG.N), eventually could be taken over in pieces.
Ralcorp's branded Post Foods cereals business could be sold to a company like Kellogg Co (K.N) at a premium, one source familiar with that situation said.
And since ConAgra was believed to be mostly interested in Ralcorp's private label business, it could buy what remains, the source said.
The spinoffs themselves tend to generate smaller fees for investment banks than acquisitions and depend on the complexities around the transaction, according to Lam Nguyen, vice president at Freeman Consulting, a financial consulting firm that estimates investment banking fees.
Still, the fees can be substantial. Freeman estimated that Philip Morris' spin-off of Kraft in 2007 generated around $130 million of fees for that company's banks.
Based on that, Nguyen suggested the fees for the current Kraft split would likely be in the $50 million to $100 million range.
Spin-offs also often create complex tax issues, which lead to windfalls for law firms that advise on them, he said.
That, of course, is followed by other lucrative opportunities down the line -- underwriting capital market offerings, advising on M&A deals and raising financing for deals.
Kraft's shares rose as much as 8.5 percent in premarket trading after the spinoff plan was announced, but closed down 1.5 percent amid a large stock market selloff.
Kraft, which counts Peltz and Ackman among its shareholders, is breaking up a year and a half after its purchase of UK chocolate maker Cadbury.
Kraft was advised by Robert Pruzan and Tony Kim at Centerview Partners; Roger Altman, William Hiltz and Paul Billyard at Evercore Partners (EVR.N), and Peter Gross, Andre Kelleners, Eric Dobkin, and Joe Todd at Goldman Sachs. (GS.N)
The Kraft spin-off allows the company to get rid of assets without worrying about a prohibitively high tax bill, said Frank Maher, managing director and head of KeyBanc Capital Markets' Food & Beverage investment banking team.
"There's probably not too many people that would have a strategic interest that would pay a strategic price that would compensate them for what would be a very high tax leakage on a sale," Maher said.
Kraft is likely to be followed by more companies spinning off assets.
"You're going to see many more companies starting to get broken up because in a lot of cases, the individual parts are worth more than the sum of the whole, and so there is a logic in many cases to doing that," billionaire investor Wilbur Ross told Reuters.