For a number of reasons, spin-offs have the potential to create value opportunities. Read Joel Greenblatt’s You Can Be a Stock Market Genius for more detail, but the general idea is that investors are more familiar with the parent company, and the spin-off generally becomes an insignificant part of their portfolio (or, better yet, may be precluded from staying in their portfolio due to investment constraints), so there tends to be a lot of selling pressure in the immediate aftermath. For those that stick around, there seems to be quite a bit of potential.
NY Times Dealbook discusses the rationale commonly put forth for corporate spin-offs. Buried in the middle is this interesting research study:
Read the full research study here and the Dealbook article here.
NY Times Dealbook discusses the rationale commonly put forth for corporate spin-offs. Buried in the middle is this interesting research study:
There is evidence that spinoffs create short-term value. Two university professors, Chris Veld and Yulia V. Veld-Merkoulova, have analyzed studies of spinoffs. On average, studies have found that a spinoff announcement results in an abnormal stock gain of about 3 percent.
In the longer term, researchers found, spinoffs do not produce gains over and above other similar stocks. One explanation is that the short-term gain is more a result of the anticipation of the spinoff than the actual event.The article’s conclusion is that the spin-off is not a panacea. Attention must be paid to the particular situation with particular emphasis on management’s objectives.
Read the full research study here and the Dealbook article here.
