Drilling Down on Breaking Up

Over the past year, stray assets have been lining up along Wall Street for interested investors to peruse. While these orphans can be bargains, investors should be clear about what they're getting into before deciding whether to take such deals home.

This week, the Wall Street rummage sale beefed up, with three large U.S. conglomerates -- Texas Instruments(TXN Quote - Cramer on TXN - Stock Picks), Duke Energy(DUK Quote - Cramer on DUK - Stock Picks) and Tyco(TYC Quote - Cramer on TYC - Stock Picks) -- either announcing or studying some manner of asset sale or breakup.

Shareholders generally like divestitures: A public company signals to the market it will fine-tune its focus by selling an asset, and the market can expect better returns from core segments. But there are so many different types of asset sales -- outright segment divestitures to strategic buyers or private equity firms, spinoffs, split-offs, carve-outs, partial IPOs and reverse mergers in the public market -- that deciding whether a particular transaction will indeed create value requires a probing eye.

Under the Hood

A CEO announces he will break off an asset with a common tagline: "This sale will help us focus on our core segments and unlock significant value." Shareholders, in return, bump up the company's stock on the basis of the expectation of higher returns in the core asset groups.

But depending on how a company chooses to separate an asset, the meaning for the shareholder can be very different.

"The attractiveness of a divestiture is a function of environmental conditions, as well as a company's specific interest in doing such a deal," said Robert Bruner, dean of the Darden Business School at the University of Virginia. A company can have many different reasons for divesting an asset, he says, and a divestiture doesn't always mean streamlining a business.

An outright sale of an asset to a strategic or private equity buyer can, and usually does, help the parent company post better returns in coming quarters. The purchasing entity often assumes management responsibility of the asset, and the directors in the selling company have more time to focus on their simplified business. The company also receives an immediate infusion of cash, which can be plowed into a business in which management presumably has an advantage.

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