Two recent restructuring announcements have elicited very different responses from the market, perhaps indicating that not all investors favor the current trendy wave of spinoffs that has enveloped the market over the last year.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Alexander & Baldwin (NYSE:ALEX) announced in December 2011 that the company would separate into two publicly traded companies through a spinoff of the company's transportation businesses. The market reacted favorably to this news, and bid the stock up 17% by the end of trading, the day after the news became public.

Comverse Technology (Nasdaq:CMVT) made a similar announcement in January 2012, announcing its intention to distribute 100% of the company's Comverse, Inc. subsidiary to shareholders. This subsidiary is involved with providing billing and customer management software and services in the telecom services industry.

Investors promptly sent the shares of Comverse Technology down by 6% over the next two trading days after this announcement. The market speculation was that investors preferred a sale of this subsidiary rather than a spinoff. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)

Spinoff Wave
The public market has been inundated with companies deciding that the proper future strategic course is to separate into independent companies. The energy sector has been hit particularly hard with this trend over the last year, with ConocoPhillips (NYSE:COP) announcing a separation of its upstream and downstream segments, with this separation expected to be completed sometime in 2012. Marathon Oil (NYSE:MRO) took the same strategic path and completed a similar separation in mid 2011.

One justification usually given for any proposed separation by a public company, is increased focus by management and the board of directors of the newly independent entities. Let's be honest here and say that a typical board of directors is not very involved in the management of a company and serves mostly to rubber stamp decisions of management. The oversight responsibility of the board is also exercised rarely and usually only when things have deteriorated so badly that it's too late to do much good anyway.

This brings us around to more management focus. My feeling is that if getting paid an annual salary in the low seven-figure range is not enough to make a CEO and his team focus, then maybe it's time to bring in a management team that can produce for this level of pay.

Most other reasons given for restructuring separations have little to do with how well a company operates its business, and are related to satisfying the whims of the investment community, most of whom are focused on short term performance. These include additional research coverage by the sell side, separate stock for acquisitions and greater appeal to investors looking to invest in a particular business.

The Bottom Line
The market response to two recent restructuring announcements might demonstrate investor fatigue with the recent separation trend in the market. This would be a welcome event, as the justification for this strategy is reflective of the short term thinking of most market participants. (For more, see Cashing In On Corporate Restructuring.)

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

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  3. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  4. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  5. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  6. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  7. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  10. Stock Analysis

    Are the Brands Millennials Love a Good Buy?

    Millennials make up a very big — and thus important —c onsumer generation. So if they love a brand, its stock is likely to outperform, right?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center