Investors are getting more and more accustomed to spin-off pressure being forced by activist investors. Some spin-offs take place merely because companies have decided that this is perhaps the last or only way to increase value out of the same piece of pie. These are applauded by investors in most cases, but should they be? Standard & Poor’s has decided to cover the notion of spin-offs with a real warning for the future — spin-offs often hurt the credit quality of the parent company that is left after spin-offs take place.

There have been a whopping 57 spin-offs of non-financial entities in 2014. For a comparison, there were 44 such deals for all of 2013 and 33 for all of 2012. Does this imply that a spin-off bubble is forming?

S&P’s warning is quite clear. Since August 1, 2013, S&P has either lowered or put the ratings on CreditWatch with negative implications on one-third of the companies that initiated spin-off transactions. For those investors looking for quality and strength, one-third should be an alarming number, when you hear that S&P only raised credit ratings or issued CreditWatch with positive implications on about 16% of companies.

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In short, one in three spin-off parents are likely to experience negative credit implications. And they are twice as likely to face negative credit events as they are positive. S&P said:

Longer-term credit quality for companies that execute a spin-off has deteriorated as well, since about 40% of these issuers now have lower ratings … they can weaken the business risk profile or reduce cash flow of the parent entity without a corresponding reduction in debt.

One severe case was the Automatic Data Processing Inc. (NASDAQ: ADP) spin-off of its dealer services businesses, which resulted in S&P downgrading one of the few remaining AAA-rated U.S. corporate issues to AA as the more narrowly focused business profile. The move has not harmed ADP’s stock in 2014, but losing a AAA rating is significant.

The view of 24/7 Wall St. is a tempered one that investors should at least consider. Whether an activist investor or guru chaser is behind a deal, investors need to be considering more than just a short-term juicing up of a stock.

The move to unlock value by breaking up a company is one that has been enticing for many companies, and it has been the focus of many activists. Some truly are best for shareholders near term and long term. Others, not so much. Activists generally care about today, tomorrow and next month. They generally aren’t around for what happens two and three years down the road and when the next business cycle comes to an end.

S&P has some quantifiable data, even if activists and other investors take the claim that half of the instances have no credit implications.

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