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When the Merger Doesn't Work: Saved by a Spin-Off?

Fortnightly Magazine - March 1 2000

and the financial community will say there is a mismatch in the valuations that can be easily cleaned up if Williams spins off the rest of Williams Communications as a stand-alone business, and the market will be forced to value both pieces separately. That should generate shareholder value," Cornell expounds.

How Investment Can Mask Value

It seems counter-intuitive to sell a business unit that initially raised the stock value of the parent company, such as Montana Power, Enron and Williams, which all have pursued a telecommunications strategy. But in the end, says Cornell, the diversification into telecommunications can mask the true value of the company.

"I am sure when they did this deal for Williams Communications, when they raised $600-plus million, some of that money was dividend back to the parent company. By doing that, I am sure they got some access to some capital at a more attractive rate than if they were to try to do a secondary offering on a stodgy old energy company," he explains.

"Sometimes you see these things where the parent really isn't getting the full value for their ownership in a partial spin-off. So they will go the full route and give the 80 percent to their Williams' shareholders in the form of a tax-free dividend," he says.

Moreover, Cornell believes that companies such as Enron and Montana Power may pursue a similar strategy of completely spinning off their telecommunications subsidiaries to better value each business unit.

In the case of Montana Power, Cornell says the market perceives it as a power company and in spinning off the telecommunications assets, its stocks probably will get a much higher multiple.

It appears that from electric deregulation to mergers and consolidation, a new trend may be emerging in energy - fragmentation.

Richard Stavros is senior editor at Public Utilities Fortnightly.

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