At Charles Schwab, the Internet business was run separately at first, which was crucial to its development, said Vincent Phillips, senior vice president for Web systems at the brokerage firm. But Schwab's customers eventually spurred a decision to integrate the online and offline operations, he said. And that's really the answer you need, not what makes sense from a business-planning model. Like most companies entering the untested waters of the Internet, Schwab had to face the possibility that the online business would undercut its original business. The reluctant consensus among chief executives was that if you do not cannibalize your own business, someone else will.
Analysts attribute the performance to poor integration of the online and offline businesses.
From the point of view of employees, Mr. Schwartz said, spinoffs, with their separate compensation plans and potentially lucrative stock options, can demoralize employees at the parent company and create friction in what should be a partnership. Other companies are issuing dot-com options to their offline sales forces or giving double commissions on Internet advertising sales. The greatest danger of spinning off an Internet business may be that it represents the company's future, said Professor Allen of the University of Virginia. Some companies try to avoid this danger by employing a halfway step known as a tracking stock. Instead of spinning off an operation, the company issues shares that are tied specifically to the division's performance.