You can hear investors' heavy breathing anytime they see someone say, "The company trades for less than the sum of its parts!" And why not? It sounds like a deal. If a company's parts were split up and sold or traded separately, investors gain parts worth oodles more than the original investment.
Emphasis on "if." That's the catch. Every intonation of "sum of the parts" must follow with the question, "What is the chance those parts will be broken out?" You could wait forever. Companies rarely acquire only to peaceably break up later.
For example, Berkshire Hathaway
Now let's look at companies that do offer opportunity when (everybody sing) breaking up is fun to do.
Credit where credit's bill may be due
Last month, activist investors JANA Partners wanted McGraw-Hill
The company recently agreed to split it into two, shedding Education but keeping the rest of the company together. Perhaps half a break-up loaf is better than none, but it's hard to see much upside from Tuesday's $45.25 without the full four-part reinvention. Only buying in the mid-$30s or lower would offer a sufficient margin of safety to justify an investment, depending on a greater value to these two parts.
Beaming with good fortune?
Another upcoming breakup is Fortune Brands
While some say that gains on Ackman's involvement have eliminated the upside from the breakup, his Pershing Square Management bought shares as high as $50.85 in his Oct. 8, 2010, filing and $54.49 just last month, versus Fortune Brands' Tuesday $57.06 close. My advice is to wait for the breakup and watch the two units trade. Beam for now appears to have the best assets and may be a buyout target. It's attractive if it doesn't zoom on or soon after Oct. 4.
On the horizon
Several other breakups and spinoffs loom. When Yours Truly began investing in the late 1960s, the conglomerate craze was in full swing. Before the days of massive stock-option grants, companies paid CEOs based on the size and complexity of the organization. ITT
Conglomerate Tyco International
Why special situations?
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