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3 Names in 2019 Prime for a Break-Up

We initially screened for three companies with potential for value creation through future break-ups, and have refreshed our views on these large-cap names. We believe they have the right ingredients for value creation but need activist involvement to help move things in the right direction, including through pushing the management to explore strategic alternatives.

The Edge Ingredients...
We believe identifying the ingredients for corporate change is crucial when evaluating if a given company can leverage on potential opportunities that may arise from corporate change. Continuing our previous search for companies ripe for such change, we have highlighted three names that satisfy our criteria. These include (but are not limited to):

Underperformance compared to peers and the market;
Visible road to change;
History of similar successful Spinoffs;
Reducing focus on non-core assets; and
Potential activist involvement;

In this report, we have looked at large companies that we believe have the right ingredients for value creation but need activist involvement to help move things in the right direction, including through pushing the management to explore strategic alternatives. Two of the below mentioned ideas (Merck and Roper) belong to sectors we highlighted in our report “3 Sectors to Watch for in 2018” (dated Jan. 9, 2018), as we expected to see traction for strategic change building in the Healthcare and Industrial spaces.

The Edge View...
Roper Technologies, Inc. (ROP):
Potential Spinoff candidates are its Industrial Technology and Energy System & Controls segments;
High focus on asset-light model with large recurring revenues;
Spinoff will increase transparency in the SaaS business;
Management intends to divest non-core assets;
Past record of activists breaking up industrial conglomerates;
Reducing focus on asset-heavy and cyclical businesses;

Merck & Company, Inc. (MRK):
Potential Spinoff candidate is its Animal Health segment;
Past split of Pfizer, Inc.'s (PFE) Animal Health business Zoetis, Inc. (ZTS) was a big hit;
Increasing strategic events in the animal healthcare space;
Divergent businesses with different growth potentials;
MRK's Animal Health unit is the second-largest after ZTS;
Total shareholder return performance is below peers and the index;

Oracle Corp. (ORCL):
Potential Spinoff candidates are its Hardware and Services segments;
Not currently able to build a competitive position in the cloud space;
Limited cloud metric disclosures add to investor concerns;
Underperformer on a total shareholder return basis;
Past successful track record of IT conglomerate break-ups;
Multiple expansion opportunities;