Profit From Special Situations – Spinoffs
By Jae Jun
www.oldschoolvalue.comPhoto credit: krissen / Foter / CC BY-NC-ND
What You Will Learn
● What are spinoffs● The good signs for a spinoff● Characteristics of a spinoff
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
division and then separating it to create a new company.
A spinoff usually occurs because the company
wants the public to fully recognize the underlying
assets of the division and
to get a better valuation of the whole company.
The newly created company is then valued by the market independently.
This is part 3 in a series about special situations.
You can read parts 1 and 2 here:
Part 1 - Odd lots tenderPart 2 - Book Review of
You can be a Stock Market Genius
The first good sign is that spinoffs in general beat the market
There is a chance that a spinoff index “could” serve better than an index fund.
But why?
The short answer is the people that receive the
shares, usually don’t want it.
If the spinoff is performed via an IPO, that would be a
different story as people interested in the spinoff are
the buyers.
Now if a spinoff occurs so that a previously hidden
asset is desired to be recognised,
you would think that people would hold onto the shares for dear life. Not the case.
E.g. If company ABC is a car manufacturing company
with a tiny car alarm division,
it is safe to assume the shareholders may not want
to hold a car alarm company.
Their original intention was to own ABC as a car
manufacturer. Thus, there is a strong selling pressure
following the spinoff.
Other selling factors include:
● people bought a car manufacturer, not a car
alarm company
● they don’t understand the business of the spinoffit may not fit with their investing allocation or
strategy
● the spinoff size may be a small or micro cap,
preventing safety seekers or institutions to hold onto
the shares
● debt from the parent could be loaded off to the
spinoff
All of the above reasons cause short term selling pressures which usually
result in sharp price drops within the first few weeks.
Spinoff Characteristics
1.Institutions don’t want it.
institutions have a to abide to rules such as not owning
more than a certain percentage.
They end up selling without even looking at the
business and investment merits.
2. Insiders are incentivised and want the spinoff to
succeed.
Will they be receiving stock, options or preferred stock
as compensation?
Analyze management compensation plans, actions and motives.
3. Previous hidden investment opportunity is
uncovered.
4. Keeping an eye on the parent company can also
pay off.
Partial spinoffs and rights offering are also just as
profitable as spinoffs, but I’ll skip it due to lack of experience for now.
Jae Jun ([email protected])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.