Are you Worried about a Breakup?

Since posting about my recent purchase of GE I’ve been emailed a number of times asking if I’m concerned about the increasing pressure being exerted on GE to breakup. Well the answer is no, absolutely not! Personally, I think that the real value of a world class conglomerate like GE would be unlocked if it was broken up into their separate operating divisions. It’s very rare that large conglomerates trade at a value equal to the sum of their parts and I think that GE is no exception. As a shareholder of a conglomerate you really have nothing to lose from a breakup. Instead of owning many shares of one world class company you’d own less shares of many world class companies. The only difference being is that you can sell the divisions you don’t like and in all likely hood the value of the separate companies would be greater than that of the conglomerate. So to make a short answer long----breakups are an investors best friend.

Stock Splits

I’ve got a great deal for you…..you give me a one 100 dollar bill and I’ll give you ten 10 dollar bills. Sound like a good deal? Interested? Of course your not interested...it’s not a good deal. Well this is exactly what happens when a stock splits. Essentially, you’re left with the exact same amount of pie…it’s just cut into more pieces.

So if stock splits don’t effect the overall valuation of a company why do they bother to split their stock?

• Make shares seem more affordable to small investors (although the intrinsic value of the company remains the same)
• Could increase the liquidity of the stock as there are more shares available on the market (thus making it easier to trade)
• Could split as a signal to the market that the company's share price has been increasing (the resulting attention could increase demand for the name)

I know many of you that read this blog completely understand what happens when a stock splits, but I just thought that I should go over it for those of you that don’t as I find it really frustrating listening to “water cooler” talk speculating about the potential of stocks to split.