In a Spin

The toughest test for managers is deciding what businesses to abandon


Despite the glib certainty of consultants and authors, business management is not an exact science. Degrees aside, nobody is truly a master of business administration. Management is an art and luck plays a big part in success. Still, we could wish that business were more like a science. We could wish for the chance to run multiple experiments using controllable variables. Maybe then we could predict and control business behavior. Maybe then management would be more like a science.

Every now and then, however, an opportunity for something like a scientific experiment is tossed up by the random cycles of the market. About 20 years ago, such an opportunity appeared in the airline industry. Two boards of directors of two directly competing firms, faced with nearly the same challenge, made diametrically opposed choices and played them out to the end. There's a lot to learn if we look back at the lessons of TWA and Pan Am.

For both companies, the years after 1978 were difficult. For TWA, the third-largest U.S. airline, and for Pan Am, the fourth-largest, soaring fuel bills during the second oil shock piled an operating expense on top of a strategic crisis growing out of airline deregulation. Both companies also had worldwide interests in hotels and other travel-related services that were affected by these changes in demand, supply and cost.

Trans World Corp., TWA's holding company, chose to spin off the airline and operate the related businesses. Pan Am Corp. took the opposite tack, divesting the related businesses to save the airline.

This experiment in spinoff economics indicates the importance of making the right choice. What Pan Am divested -- Intercontinental Hotels and the Pan Am Building with its choice Manhattan location -- turned out to be more valuable than the airline. In later years, increasingly desperate Pan Am managers would sell planes, terminals, leases, landing rights and anything else that would raise cash, all to save an airline that their own actions made less and less worth saving. Trans World Corp., on the other hand, spun off the airline to shareholders in 1984 and went about its other businesses, managing a portfolio that included the Hilton International hotel chain, a string of fast-food restaurant franchises, the Century 21 real-estate business and a firm that managed vending machines and cafeterias.

Unhappy Landings

In the end game, both airlines went bankrupt. TWA went through Chapter 11 twice. The equity in the enterprises as they existed in 1978 was utterly extinguished.

Pan Am actually ceased to exist, and even the power of its once-dominant brand name was brought so low that it did nothing to bolster the fortunes of an otherwise unrelated start-up airline that bought the name and logo at an auction. That airline is in Chapter 11 now, with only dim hope for survival.

TWA liquidated routes and other assets to enrich one owner, Carl Icahn, rather than to stave off creditors, as Pan Am did. The result, however, was only a little different. TWA continues to exist, but in a shrunken form, barely managing to make it through each industry downturn.

Trans World Corp., on the other hand, reformed itself into TW Services Corp. Within a few years, the directors' biggest problem was deciding which of several competing buyout bids would be the best.

Exhibit B

Students of the spinoff game might also consider another episode in experimental economics. In 1984, monolithic Ma Bell, prodded by the Justice Department's trust-busters, gave birth to seven Baby Bells. Each shareholder received one share of each Baby for every 10 AT&T shares. Of those seven, two pairs have merged, leaving five, but two also spun off their mobile-phone businesses, making seven again. And old AT&T has recently given birth to two more Babies. Manufacturing and research operations once known as Western Electric and Bell Labs now have the name Lucent Technologies, and NCR, the computer corporation purchased in 1991, is now on its own again. We recently delved into a computer database to adjust for all the spinning and whatnot.

If your grandmother owned 1,000 shares of old Ma Bell and has lived to tell the tale, but not to do a darn thing except cash the dividend checks, she owns 600 shares of Ameritech, 707 shares of Bell Atlantic, 900 shares of Bell South, 1,785.16 shares of SBC Corp., 400 shares of US West, 400 shares of AirTouch, 400 shares of US West Media Group, 324 shares of Lucent and 62.5 shares of NCR-plus the original 1,000 shares of AT&T.

The assortment of things spun off would be worth about $343,000 in Grandmother's portfolio; the AT&T would be worth about $67,500.

What's in a name? Would "Lucent" have tripled in volume if the directors of AT&T had spun off the long-distance phone company and given it that shimmering name? Probably not.

Surely a growing equipment and technology business by any other name would smell as sweet, even if the name were AT&T.

So we wonder: Why did AT&T stick with the long-distance business and let Lucent go? We don't know, but when we try to figure it out, we hear the distant roar of a Pan Am jetliner.

Fortunately for management, the directors and investors like your hypothetical grandmother, it's a lot harder to go bankrupt in telecommunications than in airlines. But the answer must be the same for AT&T as it was for Pan Am. The people who should have known the business best chose stasis over opportunity.

To a mechanic whose only tool is a hammer, all problems look like nails. To people who won their wings on flying boats, the travel industry will look like an airline. To people who spend their lives managing a complex network and wrestling with federal regulators, the communications industry will look like a long-distance phone company.

Meanwhile, Pan Am's former hotel business has been an international prize owned by Grand Metropolitan and then by Saison Group. It's about to change hands again in a purchase by Bass PLC. The local phones, cellular phones, switches and other businesses buried in the old AT&T have flowered under new names and new nurturing.

Fortunately for investors -- fortunately for the American economy -- any ill-fated management decision can be someone else's brilliant insight.

Thomas G. Donlan receives E-mail at


  1. This article contrasts the spin offs made by Pan Am and TWA two decades ago and draws broad lessons from their experiences What are the lessons and do you agree with them?
  2. What is the difference between a spin off and a liquidation of an asset?
  3. Generally speaking, awhen does it make sense for a firm to spin off an asset or division?