Spin-Off Advisors L.L.C.
Spin-Off Advisors L.L.C.

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"The Sum Of The Parts Is Greater Than The Whole"

Spin-Offs often result in a higher aggregate value for the constituent pieces. Many diversified companies are electing to spin off parts of their business, finding that this restructuring technique can create significant value for shareholders. Some of the reasons for spinning-off a company include a parent’s decision to withdraw from an industry or market due to lack of synergies or related core competencies, unsatisfactory performance of the spun-off entity, or superior margins of the spun-off entity. Newly independent companies are no longer constrained by the overall strategic direction of their former parent. This independence forces them to develop their own roadmap for success.

Spin-Off situations can be very rewarding. Investors can often achieve superior investment performance from spin-offs for a variety of reasons. Institutional investors often shy away from spin-offs. Sometimes the spin-off does not meet the investor’s portfolio requirements. For example, the market capitalization may be too small, a comparable company may already be represented in the portfolio, or the fund may be constrained by indexing requirements. This lack of initial sponsorship often creates a vacuum of downward pressure on the share price not attributable to business fundamentals. In effect, there is a temporary inefficiency that can be captured by astute investors. When one reconstitutes that parent and spin-off after a one to two year period, often outstanding overall returns are observed.

Why Spin-Offs Prosper

Much of the impressive performance comes from the altered dynamics of the spun-off business and its parent. Spin-Offs do well partly because when a business and its management are freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course. Managers have greater freedom to pursue new ventures, streamline production, and pare overhead. After the spin-off, stock options can more directly compensate management. This often leads to improved operating performance.