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Tickers in this Article: HRC, HI, BEN, SYK, IVC, OPY
There are times when investors come across public companies that possess two or more divisions operating in very dissimilar businesses. Rarely, it seems, are they able to co-exist in a profitable and effective manner. Often, one part of the company receives more focus than the other, preventing both from truly moving ahead. It seems the whole isn't greater than the sum of its parts, and so, sometimes breaking up is a good thing.

The Dirty Details
The management and board of Hillenbrand Industries came to this very conclusion in 2007, deciding the best course of action to unlock the true value of each of its businesses was to spin off the Batesville Casket Company, its funeral services division, into a new entity called Hillenbrand (NYSE:HI). Stockholders would receive one share in the new company for every share held of the original company. The healthcare services division would then be renamed Hill-Rom Holdings (NYSE:HRC). The split became official April 1, 2008. It's too early in the game to determine the results, although large shareholders like Franklin Resources (NYSE:BEN), who pushed for this move, are surely pleased.

Who Are These Siblings?
John A. Hillenbrand bought the Batesville Coffin Company out of bankruptcy in 1906, changing the name to the Batesville Casket Company. In 1929, his son, William founded Hill-Rom, figuring the casket makers his father employed would be able to make wood furniture for hospitals, providing a more pleasant place to convalesce. Starting out in The Depression, Bill convinced hospitals to take his furniture free of charge for six months, and if they didn't like it, the company would take it back at no cost. None returned, and many clients even ordered more. The healthcare services business was born. Almost 80 years later, both are still around and doing well financially.

The Numbers Tell The Story
Hillenbrand Industries 2007 fiscal year ended September 30. Total revenue for both divisions was $2 billion with net income of $190.6 million. Hill-Rom's portion was $1.36 billion or 67% of the total. In terms of net income, Hill-Rom delivered $92.8 million for a net margin of 6.8% in comparison to Hillenbrand's $97.8 million or 14.7%. Of the two divisions, Hill-Rom is clearly the growth vehicle.

Management wisely concluded that neither company was benefiting from single ownership. The casket business is slow growth with strong margins while the healthcare services unit has the potential for increased growth operating on its own. In the first quarter 2008, Hill-Rom's sales increased 6.4% to $341.4 million while Hillenbrand's were flat. In terms of profit, the funeral services division was responsible for 53% of the total net income ($44.8 million) from only 32% of the sales. Clearly, the casket business will provide the dividend investment of the two companies. (For more, check out Stock Picking Strategies: Growth Investing.)

Which Is The Better Stock?
As I mentioned above, each of these businesses possess pros and cons. There is no overwhelming favorite. With an aging population, each is in a position to take advantage of the changing demographics. Hillenbrand is the No.1 casket company in the world. It understands the funeral industry.

On the other hand, Hill-Rom is one of the Top-30 pure-play medical technology companies in the U.S., competing with Stryker (NYSE:SYK), Invacare (NYSE:IVC) and many others. It continues to garner sales internationally and on its own can make acquisitions it wouldn't before the separation. Analysts have begun to take notice. Oppenheimer Holdings' (NYSE:OPY) Ian Zaffino initiated coverage on May 2, giving it an 'outperform' rating and in a message to clients stated, "We believe the second half of this year could be an inflection point for the company, as revenue, margins and earnings begin to increase at an accelerating pace."

Bottom Line

This one is a coin toss. I say different strokes for different folks. In several quarters, I'm sure we'll see that management made the right decision. Sometimes, its better not to stay together until death does us part.

For more on break-ups that lead to profits, check out Cashing In On Corporate Restructuring.

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