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Wooing Wall Street: Choosing Between a Spinoff or Targeted Stock for that New Unregulated Subsidiary.Richard H. Pettway and Judith Johnson
indexes are statistically not significantly different from zero.
Therefore, it must be concluded that the first spinoff of Pacific Telesis did not yield any positive or negative impacts upon shareholders or ratepayers. By this finding we draw a different conclusion from what some previous research would suggest. Moreover, our results may indicate that a more normal spinoff yields significant gains because it typically concentrates assets and managerial focus on similar lines of business.
AT&T. By contrast, when AT&T announced its major restructuring, on September 21, 1995, it did appear to create significant,
positive, cumulative abnormal returns, whether measured over a two- or five-day period. These abnormal returns are quite large over the returns that were generated on the market portfolios over the same time periods. It is also clear that these returns were similar, regardless of market portfolio.
Thus, it is clear from our findings that AT&T's efforts to concentrate its business into segments, carried out by announcing a spinoff to shareholders, succeeded in creating a significant price appreciation around the announcement date. Stockholders clearly indicated that they think this strategic decision will improve the future of the company. In a competitive market for long distance, this move might be thought of as one that provides a lower cost of equity capital to the long-distance provider and allows the firm to lower prices for services.
Perhaps the differences between the no impact of the Pacfic Telesis spinoff and that of AT&T is one of size and magnitude. AirTouch formed a much smaller part of PacTel, while AT&T not only was a much larger company, but its spinoff basically split the entire firm into three parts. Clearly, the empirical evidence in these cases validates conclusions found by others: Namely, that concentrating the activities of a firm either with a spinoff or a selloff can boost value for shareholders and reduce the cost of equity capital (possibly lowering the cost of service as well).
U S WEST. A different tact was chosen by U S WEST when, on April 10, 1995, it announced a that it would issue targeted stock for its newly created U S WEST Media Group and U S WEST Communications Group. It appears clear from the analysis of the cumulative abnormal returns found in the Table that investors thought the U S WEST targeted stock issue would lead to improved performance.
Investors bid up the share prices around the announcement date, as indicated by the CAR value (Cumulative Abnormal Return (em see Technical Appendix) of over 3 percent for the two-day announcement effect above the return level generated by other security portfolios. These abnormal returns are significant and consistent with a decrease in the cost of equity capital associated with the restructuring effort. The market apparently agreed with Mr. McCormick's statements and indicated that the restructuring unlocked value in the separate business segments. t
Richard H. Pettway is professor of finance and director of the Public
Utility Division of the Financial Research Institute at the University of Missouri-Columbia. Dr. Pettway has a PhD in Finance from the University of Texas-Austin.