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If you still have your Christmas tree up, you might want to check under it for a late present.
It comes in the form of a spin-off. Let me explain.
United Technologies Corp. (NYSE: UTX) completed a $23 billion merger with Rockwell Collins Inc. on Nov. 26, 2018.
Normally, the story of a sprawling conglomerate acquiring an aerospace contractor would pretty much end there.
That's because the idea behind these kinds of bolt-on buyouts is to create new synergies that make the bigger, newer firm more competitive and more profitable.
Of course, United Technologies wants to take advantage of the Trump administration's defense buildup, one of the biggest we've seen since the Reagan era.
But in this case, the merger served as a catalyst for a much bigger change.
The same day United Technologies closed the books on the deal, it announced a broad realignment that surprised Wall Street.
Following the Rockwell acquisition, United Technologies said it would break itself up into three standalone companies.
That's great news for investors because studies have shown that these kinds of spin-offs usually lead to market-beating gains.
Just the sort of late Christmas gift investors can enjoy.
That's why today, I'm going to show you how to get in on the action.
Before it's too late…
Why (Corporate) Breakups Are Good News
Now then, almost by definition, a corporate breakup is a rallying point for a company's stock.
The reason is simple. As companies bulk up over the years, they often find that the sheer size and complexity of the parent firm's operations serve as a brake on fast-growing units.
Take a look at United Technologies to see why. Founded in 1974, the firm mostly grew organically through the 1990s. But at the dawn of the new century, it went on an acquisition spree in which it bought or invested in roughly 10 companies.
That led to corporate bloat.
And I'm not the only one who thinks some companies get too big to operate efficiently for their shareholders. The empirical data prove exactly what I'm talking about.
Lehman Bros. studied 85 spin-offs between 2000 and 2005 and found that they beat the S&P 500 by as much as 45% in their first two years as independent companies.
And the further you look back, the brighter the picture gets.
Consider that two professors at Pennsylvania State University examined 30 years of market data covering 174 spin-offs. Their study revealed that in the first three years of operations, these new companies showed price appreciations of 76%, beating the S&P 500 by 31%.
No wonder activist investors called for United Technologies to break itself up. This past spring, Daniel S. Loeb's Third Point hedge fund sent the firm a letter urging a breakup "to reverse its years of underperformance and realize the full potential of its franchise assets."
A Lumbering Giant
Loeb's team saw a firm that had simply tried to eat more than it could swallow. Management clearly have a lot on their plate in trying to manage this sprawling set of operations.
United Technologies is best known as a major player in defense with its Collins Aerospace and Pratt & Whitney divisions. But it's also a major supplier in building construction, with its Otis Elevator Co. and Carrier Corp. divisions.
These various divisions were bulked up by a seemingly endless set of acquisitions. In recent memory, United Technologies has picked up…
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.