Huh? I've never seen this, in over 20 years of using vim. To
insert a newline just use
s/foobar/foo^V^Mbar/
where ^V^M are Control-V Control-M.
I never thought of that; I've always tried what works in ed, namely:
s/foobar/foo\
bar
need a closing / for ed, but ex/vi accepts the naked version.
and that gives me
foo^@bar
I call that a bug. (This is vim 8.1).
In fairness, early vi did this too. nvi (Bostic's rewrite) which came out around 4.3 or 4.4 fixed it.
It certainly wouldn't occur to me to use ^V^M, anyhow: ^V^J would seem more reasonable, but ^V is ignored in that context.
I agree, I have tried to us the ^V^J idiom with different success. Since vim has been forced down my throat, I tend to not try it, and as you say, switch editors when I need to add a newline.
Before vim 7 there was a bug so bad I had to use nvi (and, often enough, compile it from source): at that time, undo undid everything back to the last action in vi-mode. If you had never been in vi-mode (as I usually had not) it undid everything back to the last file-loading command! That one made me grind my teeth a lot. Even now I habitually write before undoing, just in case.
Amen ... vim's undo can be ... a ... challenging for original vi user - but that has been debated here a few times and I'd rather not see another war.