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The Spin Around Spinoffs

You know the corporate spinoff craze may be nearing its peak when talk surfaces that a previously divorced corporate couple should get back together.

Last week’s suggestion by Gabelli analyst Brett Harriss that Viacom and CBS recombine nearly nine years after breaking up highlights a little-discussed reality about corporate breakups: They’re not always the optimal way to assure the long-term health of an enterprise.

Sure, spinoffs frequently help spur better stock performance in the short term. But that’s partly because the spun-off units get acquired quickly. Spinoffs are, more than most people realize, simply a tax-efficient way to sell a business.

The debate about spinoffs surfaced somewhat after Hewlett-Packard announced last month its intention to break in two, separating its PC and printing businesses from its enterprise operations. Analysts noted that the split wouldn’t resolve H-P’s key business challenges and would lead to higher costs.

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Indeed, despite the usual corporate explanation that a spinoff is designed to give a unit more focus, it’s frequently designed to allow the spun-off unit to be sold without taxes on any gains.