Less is more. This seemingly contradictory statement may be the new strategy of Wall Street, as some companies are learning to grow by slimming down. Keen investors stand to profit by keeping their ear to the street.
Many companies are seeing their futures in the form of separate entities, and are deciding to spin off one division or another in order to grow. There are a few reasons a company would choose to do this, but one of the most common is that under independent flags different companies may be able to better focus on their respective goals and market conditions.
To understand if this strategy has long-term merit, let's take a look into the past.
In 2008, Altria
The results are hard to deny. Since the spinoff, both parent and newly independent companies have rocked the Dow Jones Industrial Average (Index: ^DJI) and other comparable indexes. From the March 2008 split, Altria and Philip Morris have returned 52% and 61%, respectively, smoking the Dow Jones' 6% return over the same period.
Returns are adjusted for dividends and splits. Figures from Yahoo! Finance.
Another of Altria's spinoffs, Kraft, has seen market-beating returns since being fully sold off. During the almost six years when Kraft was publicly traded but still 88% owned by Altria, the stock underperformed the Dow Jones Index by 1.3%, virtually matching the average annualized return. Since the 2007 spinoff, Kraft's return has been more than triple that of the Dow Jones Index, doing so in only four-and-a-half years.
Apparently Kraft picked up a few moves from its former parent, as the company has recently announced its intention to split into two companies, one focusing on North American groceries, and the other focusing internationally on snack sales.
Everybody's doing it
Spinoff fever extends beyond these few instances; Hewlett-Packard
Other notable spinoff developments include Pfizer
Many companies are recognizing that bigger isn't better, and can in fact be cumbersome. Sometimes the best way to combat this is to go in separate directions. There is perhaps no better example than AOL and Time Warner's ill-fated marriage. The media and service provider merger, valued at $162 billion, is the biggest to date in American history. Yet, instead of becoming the powerhouse they planned, the pairing foundered. The move has come to be known as "one of the biggest failures in merger history" as it ended with Time Warner spinning off AOL in December 2009 at a huge loss. Though neither company has outpaced the Dow Jones Index since the division, Time Warner has tracked it decidedly more closely than when it had AOL under its wing and averaged a negative 12.1% annualized return.
It's not you, it's me
Of course splitting up a company is not a one-size-fits-all solution. The recent attempt, and subsequent bungling of the Qwikster Netflix
How to play it
Investors need to take note of the changing of the guard on Wall Street and invest accordingly. These spinoffs and sales spell huge opportunity for us to pick up newly lean and focused companies. Personally I'm looking to spun off entities with an international focus, like Abbott Labs' soon-to-be-independent medical device segment. Seen as more stable than the pharmaceutical division, and with arguably more growth opportunities abroad, what's not to like?
Foolishly free lunch
Spinoffs aren't the only special situation investors can benefit from. The Motley Fool recently compiled a special FREE report called The Hottest IPO of 2011. In addition to finding out about one killer international play, you'll also get information on the 10 IPOS you don't want to miss out on. Thousands have requested access to this special free report, and now you can access it today at no cost. You can get instant access by clicking here -- it's free!