Profit From Special Situations – Spinoffs

By Jae Jun

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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

Why Spinoff?

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.

Some Remarks

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 (jae.jun@oldschoolvalue.com)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.