Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
A split decision Business software provider salesforce.com, inc. (NYSE:CRM) is looking for shareholder approval to split its shares four-to-one because it believes investors and its employees don't like the high price. If it can whack the share price down to a quarter of what it trades at now, more people will want to buy it (that's the "increase liquidity" rationale noted above) and it will have happier employees when they get their stock options. Apparently there is low morale because shares trade for around $175 a stub, which will disappear at around $45 each.
Despite its elevated stock price, Salesforce has been accelerating the amount of money it loses each quarter. Over the last three years, revenue has grown at a 32% compounded annual rate, a prodigious achievement, though it was helped along by the numerous acquisitions it made. In 2012, Salesforce made five acquisitions, including Buddy Media for $736 million, and it bought seven companies the year before that.
Yet after peaking at $80 million in 2010, net profits have turned into net losses -- and by a significant amount. At the start of 2012 it had a net loss of $11.6 million; by the end of the third quarter trailing losses ballooned to $254 million, or $1.82 per share, largely as a result of the Buddy Media acquisition.
Four times as good? By purchasing the social-media marketing firm, and linking it together with Radian6, Salesforce does create the potential for a powerful medium for companies to use the cloud to market and analyze their business. SAP AG (NYSE:SAP) bought networking and online commerce software developer Ariba for $4.3 billion, recognizing the convergence occurring between the cloud and business insight, while Oracle Corporation (NASDAQ:ORCL) bought social-media marketer Virtue and then analytics analyzer Collective Intelligence for much the same reason. Microsoft Corporation (NASDAQ:MSFT) got into the act, too, buying Facebook Inc (NASDAQ:FB)-for-business platform Yammer for $1.2 billion.