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.

Join the newsletter!

Or

Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

More about Bancorp Piper JaffrayBank Onebarnesandnoble.comBarnes & NobleForrester ResearchNYSE

Show Comments