Why we like spinoffs so much

Article Excerpt

We think that spinoffs are the closest thing you can find to a sure thing for two main reasons: 1) The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s all but certain that business, and the parent, will be better off after the spinoff. 2) Spinoffs involve a lot of work and legal fees. The parent will only spin off the unwanted subsidiary if it can’t sell the stock for what it feels it is worth. That’s why firms have an incentive to do spinoffs under two sets of favourable conditions: When they feel it is not a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future. Needless to say, things don’t always work out. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in…