Points To Consider:
Spin-off pricing inefficiency,
where it can be accurately identified, holds the potential for
above average investment returns over time. Nevertheless, factors
such as timing of the initial purchase, length of the holding
period, and selectivity are critical to successful spin-off
Unlike IPO's (roadshows and post
IPO syndicates) analyst coverage on new spin-offs is severely
limited leading to a lack of institutional sponsorship. Therefore,
spin-offs don't get "talked up", hiding their inherent
value. Spin-Offs are in effect new issues, but there is no
underwriter or promoter telling the investment community what the
company is worth.
Investment Advisors often recommend
that their clients sell the spin-off shares indiscriminately
because it often doesn't fit within the Advisor's financial
planning framework. This works to the advantage of the astute
Parent companies many times become
acquisition targets after they complete a spin-off. This can be
Structural selling of spin-offs
happens due to index fund selling (because the spin-off is not in
the index), lack of yield, odd-lot selling and limited liquidity.
Many uninformed shareholders
receive shares in a spin-off that they have not chosen to receive
and think have no reason to keep, prompting them to sell them in a
Spin-offs are five times more
likely to be acquired.
Spin-offs provide a means for the
spun-off entity to secure better access to expansion capital.
Wall Street likes to apply a
premium to "pure plays" which spin-offs represent.
Academic studies have confirmed
that spin-offs on average have outperformed the general market
(S&P 500) and that spin-offs many times improve the market
performance of the parent company as well.
- "Restructuring through spin-offs,
equity carve-outs, and tracking stocks can create shareholder value.
In the longer term, equity carve outs in which the parent company
retains majority ownership easily outperform the Russell 2000 index,
with an average annual total return to shareholders (TRS) in the two
years after issue of 24% as compared with 11%. Spin-offs also
substantially outperform the market, showing a two-year annualized TRS
of 27%, compared with 14% for the Russell 2000 and 17% for the S&P
500." Tracking stocks returned 19%. Overall, the average
improvement in the P/E multiple of the consolidated parent and
subsidiary outperformed the market by 21%.
Study of the performance of 168 large
ownership restructurings-- those in which the parent company had
revenues upward of $200 million at the time of disaggregation--that
have taken place in the United States during the time period
1988-1998. The study was published in The McKinsey Quarterly,
1999 Number 1, pp. 16-27
- A 1998 working paper from Pennsylvania
State University examined 83 equity carve-outs done between 1981 and
1990, and found that carved-out companies had significantly higher
revenue and asset growth, higher earnings, and higher capital spending
than the industry average during the first three years after the
carve-outs. A similar study by J.P. Morgan & Co. which examined
101 carve-outs between 1986 and 1997, documented that, on average, the
share price of the parent rose between 3-4% in the 90 days following
the announcement of a carve-out. In the case of 12 carve-out companies
in which the parent announced there would be a later spin-off, the
share price of the carve-out performed 11% above the market 18 months
after the initial public offering.
CFO Magazine, March 1999, pp.
- A sample of 174 spin-offs, followed by
Professors James Miles and Randall Woolridge of the Smeal School of
Business at Penn State University between 1965 and 1994, returned an
average of 18% in the first year, 51% in the first two years and 76%
in the first three years outpacing the S&P 500 by 31%.
Bloomberg Personal Finance,
September 1999, p. 27 and Spin-Off to Pay-Off, An Analytical Guide
To Investing In Corporate Divestitures by Joseph W. Cornell, CFA, p.
- "Over the two-year period prior to
the spin-off, the stock price of the average parent company
outperforms the stock market by 35% on average. After the spin-offs,
stock returns of both the parent and the spin-off outperform the
market, on average. Over the entire three-year period, assuming
portfolio rebalancing, we find a compounded raw return of 106.6%,
which corresponds to a compounded annual return of 27.4%. The largest
returns come between one and two years after the distribution month.
"Some New Evidence That
Spin-Offs Create Value" by professors James Miles and Randall
Woolridge of Penn State University, and Patrick Cusatis of Lehman
Brothers. (See "Spin-Off to Pay-Off, An Analytical Guide To
Investing In Corporate Divestitures" by Joseph W. Cornell, CFA,
pp. 33, 35)
- A J.P. Morgan study of 231 spin-offs
and carve-outs between 1985 through 1998 found that during the first
18 months of trading, straight spin-offs beat the S&P 500 by 11.3%
vs. 10.1% for carve-outs.
Business Week, December 13,
1999 p. 198
- "Spin-Offs create opportunity
through inherent neglect."
Andy Graves, Portfolio Manager for
Brandywine and Brandywine Blue Funds
- Spin-Offs with promising
longer-term fundamentals should be purchased no later than six months
after the spin-off. Price performance suggests that this is typically
an optimal period to selectively buy this class of security. Buying at
this time would have yielded the maximum price appreciation over the
ensuing 12 to 18 months.
Spin-Off to Pay-Off, An Analytical
Guide To Investing In Corporate Divestitures by Joseph W. Cornell,
CFA, p. 66
- These studies demonstrated that
the announcement of a corporate spin-off or carve-out is associated
with positive stock price movements in the parent's stock.
Schipper and Smith, 1986
(carve-outs), Hite and Owers, 1983, Miles and Rosenfeld, 1983 and
Schipper and Smith, 1983 (spin-offs)
- A J.P. Morgan study of 77 spin-offs
from 1985 through 1995 shows that spin-offs outperform the stock
market by more than 20% on average during the first 18 months after
the transaction. The same study found that parent companies outperform
the overall stock market by 5 to 6%, on average, between the spin-off
announcement date and the actual spin-off. There is considerable
academic research on spin-offs that suggests that they outperform the
general market by a considerable margin. Hite and Owers, Shipper and
Smith, and Miles and Rosenfeld document a mean abnormal spin-off
announcement return of approximately 3%.
Hite and Owers, "Security Price
Reactions Around Corporate Spin-Off Announcements," Journal of
Financial Economics, 1983, vol. 12(4), pp. 409-436; Schipper and
Smith, Effects of Restructuring on Shareholders Wealth: The Case of
Voluntary Spin-Offs," Journal of Financial Economics, 1983,
vol. 12(4), pp. 437-468; and Miles and Rosenfeld, "The Effect
of Voluntary Spin-Off Announcements on Shareholder Wealth,"
Journal of Financial Economics, 1983, vol. 38, pp. 1597-1606 each
documents a mean abnormal spin-off announcement return of
approximately three percent.