The McDermott International, Inc, (NYSE:MDR) upcoming split will create two stand-alone companies, each with a sharp focus on construction and engineering niches that have high growth characteristics over the long term.

IN PICTURES: Learn To Invest In 10 Steps

Split Personalities
McDermott International has announced a plan to split its two operating subsidiaries, Babcock & Wilcox Company and J. Ray McDermott, S.A. into two separately trading publicly traded companies. Babcock & Wilcox will be spun out to McDermott International shareholders by the end of 2010, and McDermott International will then change its name to J. Ray McDermott. Babcock & Wilcox focuses on nuclear power generation and components, while J. Ray McDermott is a leader in the oil and gas offshore construction market.

Babcock & Wilcox Company
Babcock & Wilcox Company is a leader in the design and manufacturing of power generation equipment in nuclear and non-nuclear applications. It also has a large Government Operation segment that works with the Department of Energy. Babcock & Wilcox had sales in the first nine months of 2009 of $2.1 billion with an operating margin of 12%. Its backlog stands at $4.6 billion.

J. Ray McDermott
J. Ray McDermott is in the offshore oil and gas construction business. This subsidiary constructs offshore production facilities and installs sub sea infrastructure to allow offshore production. In the first nine months of 2009, 90% of its $2.6 billion in revenues were from international projects. Its operating margins were only 8.5% in 2009, but reached a peak of 16.4% in 2007.

The management of McDermott International gave many reasons for the separation. Most of these were the usual litany of corporate speak like sharper focus, increased shareholder value, etc. There was one very practical reason for the separation. Recent regulations passed by the federal government prevent new contracts from being given to companies with an inverted domestic corporation status.

The government defines an inverted domestic corporation as one "that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country."

McDermott International became an inverted corporation in 1983, when it changed its incorporation to Panama. Many other companies have an inverted domestic corporation status. These include Nabors Industries Ltd. (NYSE:NBR), Noble Corporation (NYSE:NE) and Ingersoll-Rand PLC (NYSE:IR).

This would impact only Babcock & Wilcox Company, since it does a considerable amount of business with the government, particularly in the Government Operations segment. After the separation, Babcock & Wilcox will incorporate in Delaware so its government business is not threatened, and J. Ray McDermott will keep its Panama incorporation.

The Bottom Line
It is not entirely certain that McDermott International will create shareholder value from the upcoming split of the company into two pieces. It will, however, solve a big problem with its inverted corporate form that would threaten an important part of its business. (For more, see Parents And Spinoffs: When To Buy And When To Sell.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.