Of splits and split-ups

A time-honored tradition for growth companies is the stock split. While one could debate the ultimate value of these splits, few question it as a rite of passage and an important tool to keep the stock prices of growth companies at a reasonable level.

More recently, and new to the technology industry, we have witnessed a tool for slower-growth companies to presumably prop up their stock value--the split-up.

Some firms have chosen to sell non-core assets to other higher-multiple concerns, but maintain ownership of its own high-flying stock (such as Seagate's sale of its software business to Veritas for an ownership stake). Others have chosen to issue multiple classes of stock to highlight different parts of their businesses that are misunderstood (and presumably undervalued), such as Quantum's recent move to issue shares that track its high-growth, high-margin tape business.

Still others, most notably Hewlett-Packard, have chosen to completely split the company--a suggestion that two companies are better than one.

What's important for stock owners and potential investors is to really uncover what is different today, after these split-ups, and what could potentially be different tomorrow, in terms of value. In my view, it's often not much.

As an analyst, how do I look at a stock split? I'm of two minds (no pun intended). My logical half sides with empirical studies that have shown that the long-term stock performance of companies that have split their stock is no different from the market performance as a whole. And I'm a believer in the truth of higher math, which unequivocally states that 100 shares of a $100 stock is exactly equal to the value of 200 shares of a $50 stock--the net result of a stock split.

But part of what I have to do as an analyst is predict investor sentiment and attitude; and to many investors, a stock split represents an indication that the company has been doing well, and will continue to do so. Also, lower stock prices enable a greater number of investors to buy 100 share blocks, increasing the available market of buyers. And finally, because so many recent stock-splits have driven near-term price appreciation, the mere announcement of one attracts even more buyers to trade on the news.

But investors have to realize this is a short-term phenomenon--a stock split, in my view, adds no long-term value to the company, which is truly what drives stock appreciation over time.

And how do I view split-ups? My view is that these gyrations will have little positive near-term impact, but may have long-term benefits; for example, a split-up is not the same as a split. But beware, as the potential positives from split-ups are very uncertain, and are likely to accrue slowly.

Look at Hewlett-Packard, for example. Dividing the company into a Test & Measurement group and a Computer group makes sense, as there is little overlap and the original combination sapped management focus. But near-term, the company likely will face significant disruption as the two parts are divided, causing employee uncertainty (and lower productivity) and significant costs. And long-term, the investor is left with two companies that haven't really changed and still have the difficult challenge of restarting revenue growth. Of course, if new management can better steer each company toward future opportunities, then the net result will be positive--but that possibility could occur without a split-up.

So, the bottom line is, be wary of splits or split-ups. While many stock splits are signposts along the way of a multi-year growth story, others turn out to be the last hurrah. And while many split-ups unlock hidden value (a Lucent buried inside an AT&T), others leave the investor with exactly what they had before.

The preceding comments should not be considered a recommendation concerning the purchase or sale of any securities mentioned therein.