Most investors want to see big growth from the companies whose stocks they own. But increasingly, it seems like the favorite news shareholders can hear is that their company is breaking itself up into pieces.
Look back over the past year and you'll find plenty of companies that are splitting themselves into pieces. Motorola stuck its mobile business into Motorola Mobility
When the whole is less than the sum of its parts
If that sounds like fuzzy math, there's a good reason: It's the exact opposite logic that you hear when mergers and acquisitions are in vogue. Companies that are tying the knot usually argue that because of potential cost savings and the value of combining complementary divisions within a single corporate entity, the prospects for their joint businesses going forward are stronger if they unify their efforts.
But at times like this when spinoffs become more popular, it's easy to find statistics talking about how rarely mergers and other business combinations end up adding value. What seem like promising pickups for growing companies often turn out to be serious missteps that end up not only falling short of their potential but also threatening their very survival. In that light, the divide-and-conquer strategy seems like a less foolhardy way to focus on certain investing areas.
More often, though, the incentive for spinoffs comes from some market inefficiency that undervalues a certain type of business. For instance, right now, investors have painted just about every financial stock with the same tarring and feathering that they used to reserve for the most endangered institutions. Some now see the ultimate financial conglomerate, Berkshire Hathaway
Far from a sure thing
What investors remember most about spinoffs are the success stories. Whenever the idea of spinoffs comes up, success stories inevitably follow. With Chipotle
But not every spinoff succeeds. According to research from consulting firm A.T. Kearney, parent companies often make mistakes when they decide that units need to exist on their own. The current controversy over Netflix
Not a silver bullet
As popular as spinoffs have been lately, you shouldn't see them as an automatic victory for shareholders. In this environment, most companies announcing spinoffs can expect short-term share gains. But truly assessing whether dividing up a company will add value takes a lot more effort -- and sometimes, you'll find that the spinoff that other investors are praising gives you a chance to head for the exits before the bottom falls out of the deal.
Spinoffs aren't the only way to find great stocks. Read this free special report from The Motley Fool to learn about five stocks we own that you should, too.
