More Technology Companies Ought To Execute Tax-Free Spinoffs
More companies - especially large technology companies with distinct, diverse business units - ought to execute tax-free spinoffs.
Spinoffs allow investors to separately value businesses that have different valuation characteristics and therefore different valuation multiples (think about AWS versus Amazon’s online retail business versus in-store grocery / Whole Foods).
Further, spinoffs allow the business that was spun off to flourish outside of the parent. For example, I mentioned AutoZone’s ALLDATA business earlier this week. What could ALLDATA do if it had its own mandate and balance sheet separate from AutoZone? ALLDATA management could get creative regarding new products and M&A strategy. Years ago the ALLDATA business was led by AutoZone’s CFO (I’m not sure of ALLDATA’s leadership structure today). That’s not the way to do it. ALLDATA deserves a full-time CEO that sleeps, eats and breathes the business 365 days a year. Not to mention the fact that ALLDATA would command a superior valuation multiple to AutoZone.
I prefer tax-free spinoffs - why make the Government your partner if it does not have to be? The tax-free spin-off distributes shares in the spinoff to existing shareholders on a pro rata basis.