Spin-Off Research In the News

Breaking Up is Good to Do

Posted by Joe Cornell, CFA on Mon, Aug 26, 2013 @ 10:08 AM
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Below is an excerpt from the 8/24 Barron's article "Trading Glitches Only Postpone Market Gains":


BREAKING UP CONTINUES to be good business for Corporate America and its shareholders. We're talking about spinoffs, a topic that we addressed here last December.

In terms of deals and dollar volumes, this year's spinoff total should top that of 2012, turning in a fourth consecutive annual rise. There's a good chance it will surpass the peak year of 2007, when 34 were completed.

Through mid-August, 22 spinoffs were effected, with a market value of $124 billion, according to Joe Cornell, head of Spin-Off Advisors in the Windy City. That compares to 15 transactions in the same period last year when dollar volume was about half this year's.

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What's more interesting for investors is that both stock market prices and research studies suggest that spinoffs work, bringing a more efficient allocation of capital and a higher combined stock value to the two resulting companies.

Typically, a spinoff is done when one or more corporate divisions don't fit strategically and operationally with others, and management thinks the firm's market value doesn't fully reflect all of its businesses. The expectation is that the total value of parent and spinoff will be higher than that of the pre-split company. It's also a tax-efficient way of giving shareholders separate shares—depending on the method used—of the new company, often a pure play stock. These splits sometimes simplify the companies' finances and operations, making it easier for analysts and investors to understand them.

The biggest so far this year came early, when Abbott Laboratories (ABT) spun off its traditional pharma business into a new company, AbbVie(ABBV). As of Thursday, the combined value of the two was $122 billion, up about $20 billion—a nearly 20% rise that tops the market's 17% jump, even though the shares of Abbott have underperformed this year. Abbott is comprised of diagnostics, medical devices, nutritionals, and branded generic drugs.

"It's all about focus," says Cornell. In a conglomerate structure, management is trying to allocate capital among a number of potentially disparate businesses "and it's difficult to have the skill sets to do that well."

Post spinoff, "managers get religion" and go from empire building to focusing on shareholder value, he adds. "Fundamentally, something changes [in the spun-off businesses] when the managers are on their own." Two to three years down the road, costs come down, operating performance improves, and that gets reflected in the stock price, Cornell says. Portfolio managers like pure-play investments and are willing to pay higher valuations for them.

In addition, the recent increase in shareholder activism has also contributed to the market-beating returns. For example, the Guggenheim Spin-Off exchange traded fund (CSD) has outperformed the broad market for years (See chart. "Breaking Up Is Good to Do".) This ETF seeks to mimic the Clear Spin-Off Index, which is comprised of about 40 U.S. stocks of companies that were spun off within the past two years. Measured from the market's low in March 2009, the fund is up about 300%, more than double the market return.

Nevertheless, spins seem to work well in a bull market, and the ETF offers a simpler and less risky way to invest in them.


Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Tags: Abbott Spin-Off, AbbVie, Guggenheim Spin-Off ETF