I recently read that Alcoa, a publicly traded company (AA), will soon split into two publicly traded companies.
While merging two companies makes sense to me, splitting does not. Merging companies leads to eliminating duplicated effort, reduced cost in management, ability to negotiate better deals, etc. Rationale for splitting reads like the opposite of those points.
A split like this sounds like an opportunity to take a profit center away from the larger company so that it is less encumbered by debt and market stagnation. So, the original company will continue business as usual and any shares that one holds in the original company will depreciate because it has lost a critical, profitable part of itself. On the other hand, the new company will see rapid growth.
How are shareholders insured to receive a fair percentage of each company so that growth in one will evenly offset the decline in the other? Or, maybe shareholders should quickly sell of their shares in one company or the other? Executives in the two new companies know very well the valuation of parts they now have, but it would seem difficult for new shareholders to have any idea until at least after quarterly results.
It's fairly easy to act on this as a trader, but probably not so for mutual fund holders or 401K type investors. Imagine an extreme scenario where the company is split into two and one carries all the profit and production, and the other carries all the debt and no production. A trader would immediately sell of shares on this news, but not everyone is actively managing individual stocks.