Spin-Off Points To Consider - Pricing Inefficiency, Structural Selling
- 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 investing.
- 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 investor.
- Parent companies many times become acquisition targets after they complete a spin-off. This can be very lucrative.
- 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 knee-jerk fashion.
- 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.
