merger

When a company sets up one of its subsidiaries or divisions as a separate company and hands the stock out to its investors as a special dividend, it tends to unlock hidden value. Over time, the combined value of the post-spinoff parent and spun-off company usually exceeds the value of the parent before the spin-off. Mind you, this is a general tendency, not a guarantee of continued profit. Nor does it provide protection against the effects of a bad market. During the Internet boom of a few years ago, for instance, many tech stocks spun off their Internet divisions. When that boom turned to bust, these Internet spin-offs plunged with the rest of the sector. Here is our updated analysis of spin-offs carried out by stocks we recommended. All three paid off and helped unlock some of the hidden value in the parent company. But not all of them are buys....

THE PROCTER & GAMBLE CO. $58 (New York symbol PG; WSSF Rating: Above average) is one the world’s largest makers of beauty, personal care and household products. It currently has 22 brands that each generate over $1 billion a year in sales. North American accounts for half of its sales. In October 2005, Procter acquired The Gillette Company, which makes a variety of consumer products such as razors, dental products and batteries. These products nicely complement Procter’s brands, and tend to earn higher profit margins. Procter paid $57 billion in stock for Gillette. But an aggressive stock buyback plan means it really financed 40% of the deal with cash....

VERIZON COMMUNICATIONS INC. $31 (New York symbol VZ; WSSF Rating: Average) provides local and long distance phone service to 145 million customers in 29 states. Through 55%-owned Verizon Wireless, it offers wireless service to 49 million customers across the United States. It also provides Internet access to homes and businesses, and publishes telephone directories. In January 2006, Verizon acquired long distance provider MCI, Inc. for $8.5 billion in cash and stock. The company hopes that MCI’s large corporate client base and fiber optic network will help it keep up with its main rivals, who are using acquisitions to expand market share. MCI will add about $15 billion to Verizon’s annual revenues of about $75 billion. However, integration costs may hurt Verizon’s earnings growth in the next two to three years. Verizon probably earned $2.55 a share (total $7 billion) in 2005....

FEDERATED DEPARTMENT STORES, INC. $71 (New York symbol FD; WSSF Rating: Average) operates around 990 department stores in 45 states. In August 2005, Federated paid $11.7 billion in cash and stock for rival May Department Stores Co. Thanks to the merger, Federated’s sales rose 65.7% in its third fiscal quarter ended October 29, 2005, to $5.8 billion from $3.5 billion. On a same-store basis (excluding the May stores), Federated’s third quarter sales grew just 0.6%. Federated had to borrow the cash to buy May. That increased its long-term debt from 0.4 times equity at the end of fiscal 2005 to 0.7 times....

We’ve often pointed out that growth by takeover or merger is riskier than internal growth. It’s especially risky when companies make a habit of it. However, well-established companies do sometimes pole-vault over their growth targets with well-thoughtout, well-timed, one-of-a-kind mergers, with or takeovers of, well-established companies that have complementary profit centers or growth potential. These three companies have done just that recently. Right now, however, only two are buys....

BANK OF AMERICA $47 (New York symbol BAC) aims to complete its acquisition of MBNA CORP. $27 (New York symbol KRB) in January 2006. The merger seems certain to go through, so MBNA stockholders should tender their shares to avoid paying brokerage fees. Bank of America is a buy. THE BOEING CO. $71 (New York symbol BA) has raised its quarterly dividend 20%, from $0.25 a share to $0.30. The new annual rate of $1.20 yields 1.7%. But high fuel costs could slow demand for new planes. Hold. GENERAL MILLS, INC. $50 (New York symbol GIS) raised its quarterly dividend 3.0%, from $0.33 a share to $0.34. The new annual rate of $1.36 yields 2.7%. Earnings should grow 6% in the current fiscal year, despite rising marketing and other costs. Buy....