Is a Breakup the Smartest Move for Ingersoll?


The skilled activist investor is a dedicated beast. Once he has a company in his sights, there almost certainly will be some form of change on the horizon... whether or not that investor made a jump to the board of directors. For Ingersoll Rand , that activist investor is Nelson Peltz via his Trian Fund Management LP. And for Peltz, the necessary change seen in the distance was a corporate restructuring, which has now resulted in a security technology spin-off from the industrial giant. Let's take a look at the upcoming company, and see if investors should take note.

Peltzing away
Peltz, like his activist brethren Sardar Biglari, Bill Ackman, and Carl Icahn, is a believer in unlocking hidden value in big companies. When Trian first took a position in Ingersoll Rand in May of this year, it was announced that Peltz wanted the company to be broken up into three pieces. In August, Peltz took a board seat to further wield his influence over the company. As this was happening, Ingersoll was actually making progress on its own, expanding margins and successfully implementing cost-cutting procedures. The stock performed accordingly, rising almost 50% year to date. In the end, a compromise was reached between Trian and Ingersoll management: The company would spin off its security businesses in one year, initiate a share buyback program, and increase the stock dividend by a whopping 31%.

So far, this news has been met with mixed reviews. Trian, of course, is quite happy at the arrangement. The fund's 7% stake in Ingersoll has already appreciated nicely since its original purchase in May, and it will soon represent a greater portion of Ingersoll ownership as the company takes shares off the table. Analysts, according to a Wall Street Journal report, are not as excited.

Unnecessary spinning
The two analysts cited in the WSJ article see no additional value in spinning off the security businesses to the parent company. A Citi analyst pegs the value of the security business at around $10 per share, and the rest of Ingersoll's segments judged to be worth about $40 per share. Today, the company trades around $48.

So is the spin-off necessary? Some critics of Ingersoll think this was the only way to crystallize the value of the company because its wide array of businesses just didn't mesh well together. This was a similar argument about the former Fortune Brands, which has now become Beam and Fortune Brands Home and Security . Bill Ackman spearheaded the activist effort to split that company up, and the result has been very lucrative for Ackman and investors in both companies. On a surface level, the story looks strikingly similar.

Still, for the aforementioned analysts, this spin-off may not be quite as successful, given that Ingersoll's brands aren't necessarily lacking in value. The reason could be as simple as the fact that the macroeconomic environment has taken its toll.

This Fool's opinion
It may not yield any substantial value to shareholders, but I can't see it hurting, either. The security portfolio of Ingersoll Rand is a great collection of companies that could easily function as a stand-alone organization that is easy for analysts to model and evaluate. Some of the brands owned by Ingersoll's security umbrella are well-known among consumers, such as Schlage, Briton, and Kryptonite.

The new company is expected to bring in around $2 billion in revenues on an annual basis, compared to Ingersoll's 2011 revenues of $14.8 billion. This year's revenues are set to come in around $14 billion. The conglomerate makes products ranging from golf carts to heating and cooling systems.

The spin-off may not be too exciting for investors, but the share buyback program to the tune of $2 billion, and the dividend increase, should make current shareholders happy campers, as their individual stakes and dividend checks will get a nice boost.

Spin-off specialists should nonetheless take a closer look at the story as it develops over the next 12 months.

In conclusion, chalk up another victory to the activist shareholder, who only seems to increase his influence in a new age in which shareholders actively police management.

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Fool contributor Michael B. Lewis has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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