NEW YORK (CNN/Money) -
Some technology giants are getting ready to test the notion that the sum of the parts can be greater than the whole.
Earlier this month, telecom equipment company Motorola announced that it was looking to shed its semiconductor business. And last week, tech services firm EDS said it was considering an initial public offering for its software division, PLM Solutions.
Neither company has given any specific financial details about possible sales, but analysts estimate that Motorola's semiconductor business could be worth between $5 billion and $10 billion.
With tech stocks enjoying the type of momentum last seen in 1999, companies like Motorola (MOT: Research, Estimates) and EDS (EDS: Research, Estimates) appear to be betting that investors will pay more for a separately traded division in a hot market than they are paying currently for the larger parent companies.
Motorola, for example, trades at 15 times 2004 earnings estimates. But Dassault Systems (DASTY: Research, Estimates) and SAP (SAP: Research, Estimates), two software competitors of PLM Solutions, trade at price-to-earnings multiples of 28 and 31, respectively.
"Larger companies have divisions that all of a sudden have value now after this bear market," said Kathy Smith, research analyst with Renaissance Capital, which runs the IPO Plus Aftermarket fund. "Nobody would have been interested in a semiconductor company a year ago."
Who could be next? Michael Mahoney, managing director with EGM Capital, a hedge fund focusing on technology and telecom stocks, said that Lucent and IBM might want to consider shedding divisions.
In the case of Lucent (LU: Research, Estimates), Mahoney said that Lucent could choose to focus more on its growing telecom services business and sell the equipment side, which continues to struggle in the wake of a telecom spending slowdown.
For IBM (IBM: Research, Estimates), Mahoney said, it could make sense to sell the PC division since Big Blue is a distant third to market leaders Dell and Hewlett-Packard. Plus, IBM's PC business lost money in its most recent quarter.
But why buy?
Still, will investors be eager to scoop up struggling divisions of tech companies? After all, the last tech sale craze was a bit different.
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With investors eager for anything Internet related in the late 1990s, companies as diverse as book retailer Barnes & Noble (BKS: Research, Estimates) and General Electric (GE: Research, Estimates) sold stakes of their Internet operations to the public. GE eventually bought back its online media unit, NBC Internet. Barnes & Noble.com (BNBN: Research, Estimates) still trades, but at about $2.40 a share, the stock is more than 90 percent below its all-time high.
Some companies were even able to find willing buyers for tracking stocks of their online operations. And tracking stocks, weren't even true divestitures. They merely tracked, as the name implies, the performance of an individual business unit of the parent and gave investors little, if any, ownership interest in the parent company.
Walt Disney (DIS: Research, Estimates), publisher Ziff-Davis and investment bank Donaldson Lufkin Jenrette (which since was acquired by Credit Suisse First Boston) all sold Internet tracking stocks. Each has been folded back into the parent company.
This time around, tech firms aren't likely to revisit the tracking stock phenomenon. Then again, they probably wouldn't want to, since they don't appear to be offering divisions that have growth prospects along the lines of the Net stocks in the late 1990s.
"Underperforming assets are not going to work in the marketplace," said David Menlow, president of IPOfinancial.com. "Spin-offs used to be desirable. Now it looks like companies want to give to the investing public divisions that they can't do anything with."
If Menlow is correct, both Motorola and EDS may find the capital markets unreceptive. Motorola's chip business reported a loss in the third quarter while PLM posted a 10 percent drop in sales during the first six months of 2003 and 24 percent decrease in operating income from the first half of 2002.
Along those lines, software firm Computer Associates (CA: Research, Estimates) has been trying to sell its accounting software unit Accpac International through an IPO for almost a year but has yet to price the offering. Accpac lost money in 2001 and 2002.
And Time Warner (TWX: Research, Estimates), the parent of CNN/Money, had hoped to sell a stake in its cable unit during the second quarter of this year but the IPO plans are now in limbo. Time Warner Cable is profitable but the operating income growth of 1 percent in the first half of 2003 lags the increases of such rivals as Comcast (CMCSK: Research, Estimates) and Cox Communications (COX: Research, Estimates).
So when it comes to tech sales, let the buyer beware.
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