September 19, 2011
Back in the day we called them "Conglomerates" and the name had a strange appeal among some investors. My corporate finance professors used to extol the advantages of diversified businesses (insurance, hotels, and aerospace, in one instance) as delivering potentially better returns with less risk. The word "potentially" always seemed to be where these companies would get hung up, never quite getting around to the better returns part.
Lately companies that have bought or merged their way into being modern-day conglomerates seem to be lining up to break into pieces, hoping the parts will be worth more than the whole. Here's a partial list: Kraft (sweets to the right, savories to the left); ITT (water here, weapons there); Sara Lee (nobody doesn't like their deal); Sun; Marathon Oil; and others. The latest one to join the list is Tyco Electronics (or as it is only recently known: TE Connectivity). "But wait," you might say, "didn't Tyco split into three companies a few years ago? Isn't this old news?" Yes and no. Tyco split into three public companies in 2007. But it's not old news: the largest of those three is doing it again.
All the merging and splitting works out well for investment bankers handling the deals and for corporate chieftains who reward themselves for all the fuss and bother. How about the shareholders (dare we call them the "owners")? A mixed bag. Decades of watching spinoffs have revealed big successes and quiet bankruptcies. In other words, business as usual. It pays to be selective when you receive spin-off shares.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).