Credit worries may spur carve-out IPOs

Credit worries may spur carve-out IPOs

	Published : Fri, 31 Aug 2007 23:10 By : Agencies Print this Story

NEW YORK (AP) - Before the credit market decline threw Wall Street into turmoil this summer, the top executives at 100 Fortune 500 and FTSE 350 companies were asked to predict acquisition and spin-off trends in their sectors for the upcoming year.

The executives were surveyed at the height of the buyout boom driven by private equity firms and the availability of cheap, easy credit. Still, nearly two-thirds of respondents predicted that demergers, or spin-offs, would be on the rise during the next 12 months. The executives expected companies to increasingly turn to pure play strategies to boost shareholder value.

The study, which was commissioned by law firm Allen & Overy LLP and conducted by the FT Research Centre, sampled chief executives, chief financial officers, heads of mergers and acquisitions and other top executives.

IPO Financial Network President David Menlow said the current credit crisis could boost that trend and heighten the appeal of carve-out initial public offerings, in which a parent company sells a minority stake in a subsidiary. A carve-out IPO leaves the parent company with the option of secondary offerings or a full sale at a later date.

Allen & Overy Partner Mike Gilligan said carve-out IPOs are more popular when the IPO market is robust and are particularly attractive options for the largest spin-offs.

In light of shrinking corporate credit, Menlow said he expects companies to turn to IPOs to raise funds that can be used to pay down debt.

According to the executives surveyed, demergers are usually prompted by negative synergies, low market valuation and shareholder pressure, particularly by hedge funds and activist investors.

'Spin-offs are also going to be increasing importance because shareholder value is going to be stressed moving forward' Menlow said, a view echoed by the executives surveyed by Allen & Overy.

Menlow cited oil company Conoco's spin off from DuPont Co. in 1998 as an example of a successful spinoff that increased value through a pure play strategy. Recent deals have had more mixed results.

Brokerage MF Global Ltd.'s spin off from Man Group in July has failed to meet expectations. The initial public offering suffered from comparisons to The Blackstone Group LP's offering, which was poorly received by the market, as well as growing concerns about decaying credit. The IPO priced at $30 and has since fallen more than 10 percent to around $23.

Another example of a less successful carve-out is that of Qimonda AG, which was spun off from chip maker Infineon Technologies AG in August 2006. Qimonda shares closed Friday at $13.36, about 3 percent above the company's IPO price of $13. The stock has traded between $11.85 and $18.95 since its IPO a little more than a year ago.

Earlier this month, Infineon said it will reduce its exposure to Qimonda by slashing its stake in the company to less than 50 percent within two years. The parent company had retained an 86 percent stake in Qimonda after its IPO.

EMC Corp.'s spin-off of virtualization software company VMware Inc., on the other hand, is touted as the hottest technology stock offering since Google Inc. After pricing at $29, the stock has more than doubled to $68.89.

'EMC only shed 10 percent; they still have 90 percent to go,' said Scott Sweet, managing director of advisory firm IPO Boutique. 'They are in a superb position to have further secondaries and ultimately perhaps sell the company at a later date.'