Investors who cash in on big premiums in buyouts and mergers can get rich fast. Spinoffs may not give you that immediate payoff, but in the long run, they may provide a bigger bump to your portfolio's performance.

A cycle of corporate organization
Corporate activity seems to run in cycles. During certain periods, investors prefer companies to find potential acquisition targets, bulking up businesses into megalithic conglomerates that dominate a single industry or stretch across multiple sectors of the economy. Corporate deals are all about finding economies of scale, cutting costs, and finding synergies that give newly merged companies a competitive advantage that neither company had before. The recent News Corp. (NYSE:NWS) bid to buy out Dow Jones (NYSE:DJ) is just one example of this trend.

But at the other end of the cycle, big businesses look to profit from getting leaner. Although the best-known spinoff -- AT&T's (NYSE:T) breaking off from the Baby Bell regional telephone carriers -- wasn't voluntary, many spinoffs are done deliberately to benefit both investors and company managers. Since McDonald's (NYSE:MCD) spun off Chipotle Mexican Grill (NYSE:CMG) in 2006, for example, both stocks have moved sharply higher. Similarly, Altria (NYSE:MO) got a warm reception when it distributed its majority ownership of Kraft (NYSE:KFT) to shareholders.

Making news
Spinoffs are also a common subject of speculation. For instance, many have suggested that Wal-Mart (NYSE:WMT) should spin off its Sam's Club warehouse stores in an effort to bolster lackluster share performance in recent years. And after a company announces a spinoff, investors struggle to decide whether the parent company or the newly spun-off business will be more successful. While the new business gets a lot of attention, don't forget the parent. Its remaining businesses often become more efficient and have sharper focus, leading to positive results.

One negative about spinoffs, however, is the headache they give you at tax time. If you decide to sell some of your shares after a spinoff, you have to be extremely careful to do your taxes right.

Dealing with the tax aftermath
The problem is with cost basis. Before a spinoff, it's easy to figure out your gain or loss on a stock; just compare its current price to what you paid for it. After a spinoff, however, things get a bit more complicated. You now have shares in two different companies, and you may even receive a small check for a fractional share of the spun-off company. When tax time comes, what do you have to do?

There's good news and bad news. The good news is that most spinoffs aren't taxable transactions, so you won't have capital gains when you get the spun-off shares. The bad news is that you have to figure out your new cost basis in each set of shares. Luckily, this isn't as hard as it sounds, as long as you pay attention to it sooner rather than later.

The general rule is that the spun-off shares take a portion of the cost basis from the parent shares. Your total basis will usually stay the same, but it will be divided between the two companies. The companies should tell you how to allocate basis among your shares. For example, in the Altria/Kraft spinoff, the distributed Kraft shares were worth about 24% of the combined company. As a result, you would allocate about 24% of your cost basis to your new Kraft shares, with the remaining 76% staying with your Altria shares.

Spinoffs may be messy from a tax perspective. But by giving you, the investor, the chance to put your money into a narrow business segment, they make it easier to invest in exactly what you think will be most profitable.

Related articles:

Wal-Mart is a Motley Fool Inside Value recommendation. Spinoffs are just one way you can find value in company shares. For more ideas on finding the best value for your investment dollars, check out Inside Value free for 30 days. You'll find out how value investing can give you outstanding long-term results from your stocks.

Fool contributor Dan Caplinger has held on to both his Altria and Kraft shares after their recent spinoff, but he doesn't own shares of the other companies mentioned in this article. Kraft is an Income Investor pick, while Chipotle Mexican Grill is a Hidden Gems and Rule Breakers pick. The Fool's disclosure policy won't leave you spinning.