Breaking up hurts. But break-ups can mean bigger returns for investors.
When companies get too big and unwieldy, they spin off parts of their business that no longer fit their core operations. Announcements of such moves have historically led to a boost in stock price, according to researchers.
Consider Tyco, which makes commercial fire and security systems. The company split off its home-security and flow-control products businesses as separate companies last year. In the six months following the spin-off announcement, Tyco stock surged 23 percent, compared with a 15 percent rise for the Standard & Poor's 500 index.
Similarly, ITT, a supplier of industrial parts and services, spun off its defense and water technology businesses in 2011. ITT stock rose 9 percent in the six months following the announcement, more than double the 4 percent rise for the S&P 500.
Seeking similar gains, activist investors have built up ownership stakes in several industrial conglomerates and are pushing them to get more focused. Even the prospect of spin-offs has helped some stocks rise.
Timken, which makes everything from ball bearings to power transmission components, has surged 37 percent since November 28. That's when activist investment firm Relational Investors and the California state teachers' pension fund said that they had built a 6 percent stake in the company and are lobbying management to spin off its steel business.Associated Press