Spin-Offs
In a spinoff, a company creates a new company by selling or distributing shares of its existing business. The spinoff effect is known and well documented, and it still persists.
The Edge Group and Deloitte published a research note in December 2014 called Global Spinoffs & The Hidden Value of Corporate Change. The survey went through all listed spinoffs since the year 2000 on the largest western stock exchanges.
The return one year after the spinoff is shown in the table given below.
| Parent company
|
Spinoff | Reference index
|
|
| Globally / all | 14% | 22% | 1% |
| USA | 21% | 27% | 3% |
| EU | 10% | 20% | 1% |
| The Rest Of The World | 3% | 18% | -1% |
The benchmark index is MSCI World for the global group and “the rest of the world”, S&P 500 for the USA, and STOXX 600 for the EU. The results show that both the parent company and the spin-off “crush” the index in the first year after the spin-off.
But even though the average is very good, an overwhelming 40% of spinoffs do not give a positive return in the first year. Although this strategy gives good results, it is the minority of spinoffs who pull up the average. The Edge Group also writes that spinoffs correlate little with the return to the market.
Why do spinoffs give better returns for both the parent company and the spinoff?
There can be little synergy between divisions. By separating the divisions into smaller units, it is easier for management to lead and focus.
In addition, “conglomerates” are often priced at a discount, and by separating divisions, both the parent company and spinoff can be priced and increase the value overall.