Profit From Special Situations – Spinoffs
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Spinoffs occur when a parent company separates one of its business divisions into a new standalone company. This allows the market to independently value the new company and the assets of the separated division. There are often good investment opportunities with spinoffs as the newly separated companies are often sold off by shareholders who did not want the new company. This creates short-term selling pressure and price drops that can be exploited. Key signs of good spinoff opportunities include management being incentivized to see the new company succeed and a previously hidden asset or business division being uncovered and separately valued.
Profit From Special Situations – Spinoffs
- 1. Profit From Special Situations – Spinoffs By Jae Jun www.oldschoolvalue.com Photo credit: krissen / Foter / CC BY-NC-ND
- 2. What You Will Learn ● What are spinoffs ● The good signs for a spinoff ● Characteristics of a spinoff
- 3. What is a Spinoff Spinoffs can take many forms but a simple definition can be defined as a corporation taking one of its subsidiary or business
- 4. division and then separating it to create a new company.
- 5. A spinoff usually occurs because the company wants the public to fully recognize the underlying assets of the division and
- 6. to get a better valuation of the whole company.
- 7. The newly created company is then valued by the market independently.
- 8. This is part 3 in a series about special situations.
- 9. You can read parts 1 and 2 here: Part 1 - Odd lots tender Part 2 - Book Review of You can be a Stock Market Genius
- 10. Why Spinoff?
- 11. The first good sign is that spinoffs in general beat the market
- 12. There is a chance that a spinoff index “could” serve better than an index fund. But why?
- 13. The short answer is the people that receive the shares, usually don’t want it.
- 14. If the spinoff is performed via an IPO, that would be a different story as people interested in the spinoff are the buyers.
- 15. Now if a spinoff occurs so that a previously hidden asset is desired to be recognised,
- 16. you would think that people would hold onto the shares for dear life. Not the case.
- 17. E.g. If company ABC is a car manufacturing company with a tiny car alarm division,
- 18. it is safe to assume the shareholders may not want to hold a car alarm company.
- 19. Their original intention was to own ABC as a car manufacturer. Thus, there is a strong selling pressure following the spinoff.
- 21. ● people bought a car manufacturer, not a car alarm company
- 22. ● they don’t understand the business of the spinoff it may not fit with their investing allocation or strategy
- 23. ● the spinoff size may be a small or micro cap, preventing safety seekers or institutions to hold onto the shares
- 24. ● debt from the parent could be loaded off to the spinoff
- 25. All of the above reasons cause short term selling pressures which usually result in sharp price drops within the first few weeks.
- 27. 1.Institutions don’t want it.
- 28. institutions have a to abide to rules such as not owning more than a certain percentage.
- 29. They end up selling without even looking at the business and investment merits.
- 30. 2. Insiders are incentivised and want the spinoff to succeed.
- 31. Will they be receiving stock, options or preferred stock as compensation?
- 32. Analyze management compensation plans, actions and motives.
- 33. 3. Previous hidden investment opportunity is uncovered.
- 34. 4. Keeping an eye on the parent company can also pay off.
- 35. Some Remarks
- 36. Partial spinoffs and rights offering are also just as profitable as spinoffs, but I’ll skip it due to lack of experience for now.
- 37. Jae Jun (jae.jun@oldschoolvalue.com) http://www.oldschoolvalue.com Old School Value improves your investment decisions and performs deep fundamental analysis and valuation for you. Just like a personal stock analyst.