Spin-Offs May Risk Spinning Out of Control

Companies offer all sorts of reasons for spinning off Internet-related activities into separate business units.

Chicago-based Bank One Corp. [NYSE:ONE] saw its creation of WingspanBank.com as the fastest way to get into the Internet banking business.

DTE Energy Co. [NYSE:DTE] in Detroit created DTE Edison America to attract much-needed venture funding and top-notch employees.

But investors need to look beyond the short-term benefits of such spin-offs.

Most of these ventures have yet to go public, and those that have are showing that they're not necessarily sure bets.

Barnesandnoble.com Inc. [Nasdaq:BNBN], for example, has declined from $19 per share last summer to the most recent price of $4.07.

Companies must also consider how each spin-off is setting up its computer systems, according to John Ekoniak, a San Francisco-based analyst at U.S.

Bancorp Piper Jaffray Inc.

"We're seeing cases where some companies are creating entirely new systems that do not communicate with the computer systems in a company's other divisions," Ekoniak notes. In doing so, they're injecting a costly layer of complexity, inefficiency and costs that will come back to haunt them, he adds.

Barnesandnoble.com, which was spun off from Barnes & Noble Inc. [NYSE:BKS], learned that lesson the hard way, says Bobby Cameron, an analyst at Forrester Research Inc. in Cambridge, Mass.

Initially, "they didn't bother to integrate [their online operation] back to the mother ship, so the SKUs were different, and you couldn't order a book online [and] then pick it up in one of the stores," Cameron says.

Don Larson, vice president of applications at Staples Inc.'s [Nasdaq:SPLS] Staples.com Internet division in Framingham, Mass., describes the spin-off's computer systems as "the best of both worlds."

"The Web environment and the firewall are specific to Staples.com, but all of our back-end systems for merchandising, catalog lookups and product data information is all shared with our catalog business," he says.

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