Published:  September 7, 2007

As we know, aggregating different businesses into a conglomerate typically produces an unwieldy and inefficient corporate structure and sub-par stock market performance. Sometimes, however, the opposite can also hold true -- breaking apart large firms into smaller more nimble companies often unlocks shareholder value and produces superior market gains.

Don't believe it? Just consider a few examples...

PepsiCo (NYSE: PEP) is best known for its namesake carbonated beverages and its Frito-Lay salty snacks group. These two businesses are classic complements -- consumers tend to buy soft drinks and salty snacks together. There are even synergies to be had in marketing the brands in tandem.

However, a decade ago the company was also actively involved in another business -- restaurants.

For many years, Pepsi owned three well-known fast-food chains: Taco Bell, Pizza Hut and Kentucky Fried Chicken. There was nothing wrong with any of these chains, and all enjoyed strong brand name recognition both in the U.S. and in dozens of other countries around the globe. Nor are fast food and soft drinks totally unrelated businesses -- after all, these restaurants also sold beverages.

However, by 1997 it had become clear that the task of managing a fast food unit and that of managing a global beverage firm were quite different. Pepsi believed that its restaurant subsidiary could benefit from a separate dedicated management team that could concentrate on expanding the chains' footprint into new markets. So, on September 17, 1997, Pepsi's restaurant business went public on the NYSE under the name Tricon Global Restaurants.

Check out the chart to the right for a closer look at how Tricon, later re-dubbed Yum! Brands (NYSE: YUM) has fared since its IPO in late 1997.

As it turned out, Tricon performed extremely well as a separate entity. The new management team successfully expanded the chain into high-growth markets like China; today YUM has more outlets in China than even McDonald's. And YUM re-focused its attention on marketing, coming up with innovative initiatives such as packaging two or more restaurant chains into a single, convenient location.

Since its IPO in 1997, YUM has delivered impressive growth and the stock has soared, returning more than +300%, versus just about +85% for the S&P 500 and just over +100% for its former parent PepsiCo.

Sound like an isolated example? It isn't. Consider also the case of popular Mexican chain Chipotle Mexican Grill (NYSE: CMG), spun-off from its parent McDonald's in January 2006. Since that time, Chipotle is up a whopping +135%.

There are certainly plenty of other examples of successful spin-offs. In fact, spin-offs are among the most reliable patterns in the stock market today. A 2005 study by Lehman Brothers found that nearly nine of every ten (88%) spin-offs between 2000 and 2005 outperformed the S&P 500 -- by an average margin of +45% in their first two years as a public company.

There's good reason for that outperformance -- spin-offs have a tendency to outperform the market for many of the same reasons that many conglomerates underperform and are eventually split up. Specifically, one of the key underpinnings of the conglomerate boom in the 1960s was that investors would prefer large diversified businesses. In reality, investors often apply what's called a "conglomerate discount" to diversified businesses -- these large firms actually trade at a price that is worth less than the sum of their parts.

The main reason is that investors tend to prefer pure-plays on a specific industry or business line. Pure-play companies allow hands-on investors the ability to diversify as they see fit and weight their portfolios according to which industries they find most attractive. In this sense, pure-play firms offer more flexibility and pinpoint control over a portfolio.

Moreover, one of the main problems with conglomerates is that management often has a tendency to neglect certain business lines. Once these overlooked companies have been spun-off, they are assigned a dedicated management team that can then concentrate on gaining expertise in their own specific industry. Furthermore, management can re-focus on growing its market and reinvesting cash in the business rather than producing profits to send back to a centralized conglomerate headquarters.

Because of the attractiveness of investing in spin-offs, Paul Tracy, editor of StreetAuthority.com's premium Market Advisor newsletter, recently scoured the market in search of recent spin-offs that have the potential to benefit from their newfound independence. In doing so, he uncovered six different spin-offs that are poised to outperform the overall market in the coming months and years. To learn more about these stocks, as well as Mr. Tracy's Market Advisor newsletter, please visit this link.