Corporate Splits, Just as Easy as TomKat Divorce

From: James Cramer
Sent: Tuesday, June 26, 2012 1:35 PM
To: Nicole Urken
Subject: NEWS CORP

Let’s gather research on this breakup and review the performance of our other breakup plays

From: Nicole Urken
Sent: Tuesday, June 26, 2012 3:35 PM
To: James Cramer
Subject: Re: NEWS CORP

Research attached along with list for performance of recent breakups — Fortune Brands, Tyco, Sara Lee, Marathon, Conoco, ITT, Covidien, Abbott, McGraw Hill, Kraft

From: James Cramer
Sent: Tuesday, June 26, 2012 4:11 PM
To: Nicole Urken
Subject: Re: NEWS CORP

Let’s also look back at Viacom / CBS and Altria / Phillip Morris

Typically, when earnings season kicks off — as it did this past Monday with the report from Alcoa — analysis shifts marginally from top-down, macro-driven to a more bottoms-up (or company-centric) posture. However, this season we remain saddled with a multitude of global growth concerns … and so, macro continues to reign supreme. The parade launch of quarterly report cards was preceded by the dismal pre-earnings present we received from the U.S. Labor Department last Friday. And internationally, continued uncertainty in Europe is front and center, exacerbated by continued debate over whether or not China will face a hard landing.

Ultimately, earnings results are being processed through the lens of macro concerns — Alcoa’s solid report case-in-point. While the company is executing well, analysts continue to remain worried about its ability to execute given the difficult environment. Additionally, the guide-down from truck behemoth Cummins on Tuesday became confirmation for many of the macro fears that have been brewing, as discussed on "Mad Money."

Given the difficulty of “individual stock picking” amidst this macro-driven environment and turbulent earnings season, one of the themes we have been coming back to on "Mad Money" is companies breaking up, a value-creation trend that has become commonplace.

Front and center this summer has been News Corp, after Rupert Murdoch announced plans to split its print assets from itscable network, television and studio businesses. But this is icing on the cake of a long list of names we have highlighted on the show that have benefitted from surges upon their splitsville announcements.

Read on for Corporate Splits, Just as Easy as TomKat Divorce

Just this past Monday, Jose Almeida, the CEO of Covidien — the health-care company that makes everything from branded drugs to medical supplies and devices — joined "Mad Money" to talk about his his business drivers. The company announced in December of last year that it would be spinning off its pharma business (about 17 percent of sales), a transaction that should be completed by mid-2013. We got behind the stock at that time, and the name has climbed a nice 20 percent since then amidst a difficult market.

Why bring this up now? Because many management teams are conscious that in the current environment, markets aren’t giving their earnings much value at all. Instead, focus has shifted to longer-term strategies and unlocking value.

Ultimately, the logic of the Covidien breakup reflects the logic behind many of the big breakups we have seen of late. Let’s take a look:

First: Lack of synergies among the segments. Covidien’s medical device business and medical supplies business have completely different life cycles from the pharmaceuticals business — very different sales channels, customers, capital requirements and talent bases. Even the segments’ product innovation pipelines diverge — as getting a new medical device approved by the FDA takes much less time and is generally much less risky than getting a new drug approved. Separating will allow each business to focus on its respective specialty areas. Additionally, more pure focuses frees up capital for investment and/or acquisitions.

Second: Ability to forecast and predict for the future. In Covidien’s case, the pharma business has historically been much more volatile than medical devices, making it harder to forecast for the full company on a sales and earnings basis. Separating will allow for more precise future measurement, which is key from an investment perspective.

Third and very importantly: Lack of recognition of full value of the growth business. Covidien’s medical device business growth is diluted by pharma’s lower margin and more volatile positioning. Breaking up will allow the medical devices' separate company to achieve the higher multiple it deserves. The separation into growth and value correctly mimics what is going on in the marketplace, in that mutual funds are either value-oriented or growth-oriented. The same fund that is willing to pay nosebleed multiples for growth will not be interested in a slow growth value company.

Ticking down some recent “breakup” winners helps drive this value-enhancing point home.