Spin offs & Mergers

[benbuffett]

Anyone following any spin offs? PayPal?

I know their are many more in the works but this seems to be a bigger one.

 

 

 

 

If theirs already a topic board forgive me.

 

 

[valueinvestingideas]

FYI - http://spinoffmonitor.com/ and http://www.stockspinoffs.com/ are great resources.

[benbuffett]

Thanks valueinvestingideas!

 

Was not familiar with spinoffmonitor but do frequent stockspinoffs.

[JayGatsby]

Does anyone have thoughts or research on the best time to buy into a spinoff (ie, before or after the spin)?

 

To use a specific example, I've been looking at the Alcoa spinoff recently which will basically separate the commodity and the value-add parts of the business. Since Alcoa is a fairly widely held name I could see some forced selling since the two companies will presumably have a smaller market cap than the whole. I could also see people more thoughtfully dump the commodity business and buy into the value-add part. I think this dynamic is probably true for a lot of spinoffs, so wondering if anyone has thoughts on it.

[Jurgis]

IMHO spin-offs were never easy money and they are even less so nowadays.

 

So to answer your question: it depends. You have to do pre-split and post-split analysis, evaluate the price & value at these points and decide based on that.

 

Companies are not so stupid nowadays and you can't know without work which part of the spin off (if any) will be good investment. Look at PGN or HYH or RYAM.

 

I have not done any work on AA.

[JayGatsby]

That's fair. I was thinking more specifically about splits where the two entities both comprise fairly large percentages of the enterprise value pre-split (EBAY/Paypal may be an example of that). You're probably right though that it's too broad of a question. There's also a lot of outside factors that influence individual situations (oil prices, etc)

 

I think spin offs provide a useful idea board of rocks to look under, but I agree with you that I would no longer invest in spinoffs blindly the way Greenblatt originally suggested. I think sometimes they're ways for management to jettison crappy investments (often along with some debt) without ultimately having to take the blame or get hit with an impairment charge.

[Aman1]

Greenblatt never suggested blindly investing in spinoffs!

 

Bigger picture, Greenblatts thesis is to own "quality" (high ROC) businesses at relatively "cheap" (EV/FCF) valuations. His later stuff on the magic formula fleshes this out.

 

Looking at spinoffs was (and still is) a good way to assess stocks on the above criteria where you have a head start over lazy investors; it's financials are  not yet in data streams like Bloomberg and Factset so will not show up on screens, plus a lot of investors won't touch an SEC 10-12B form. The relatively small spinoff also has the forced selling characteristics you discussed.

 

If you want a Q4 2015 spinoff as an example, take a look at Associated Capital Group (TIcker: AC). Trading at a 30% discount to liquid balance sheet investments and you get the opco (a $1bn hedge fund) for free.

[Aman1]

For anyone looking at US spin-offs, the following is a must-bookmark link. Forget middle-men, this is the best way to periodically review the lastest spin-offs directly:

 

http://www.sec.gov/cgi-bin/srch-edgar?text=form-type+%3D+10-12b+OR+form-type%3D10-12b%2Fa&first=2015&last=2016

 

 

 

[valuechaser]

I recently reread Greenblatt's book and am starting to dive back into more event driven type of investing. I'm surprised it's not discussed more often on this forum. It would be great to hear about people's experience with these types of ideas (spinoffs, merger securities, etc).

 

Greenblatt makes it sound very easy in the book and some of the case studies presented seem to suggest that institutional investors don't pay attention at all to these types of transactions (for example the highly publicized Viacom / Paramount transaction) but I don't think that's the case, at least not anymore. I still think there are opportunities in event driven investing but maybe not as wide open as it was even 15 years ago.

 

Can anybody share their thoughts / experience with an event driven strategy?

[Jurgis]

Yeah, it's not super easy (anymore?)

 

There was a number of spinoffs that cratered last year. I made money on some, sold some at a wash, most dropped more after I exited.

 

It's still possibly a good place to look. Possibly even at the fallen angels, i.e. the ones that cratered. DNOW (oil/gas related though), HYH, HY (oh, actually it recovered and I guess it's no longer a spinoff at this point).

 

OTOH, I am not an expert in this area, currently I mostly buy owner operators with good management (with some exceptions haha). Not that many spinoffs in that land apart from Malone constellation.

[oddballstocks]

I recently reread Greenblatt's book and am starting to dive back into more event driven type of investing. I'm surprised it's not discussed more often on this forum. It would be great to hear about people's experience with these types of ideas (spinoffs, merger securities, etc).

 

Greenblatt makes it sound very easy in the book and some of the case studies presented seem to suggest that institutional investors don't pay attention at all to these types of transactions (for example the highly publicized Viacom / Paramount transaction) but I don't think that's the case, at least not anymore. I still think there are opportunities in event driven investing but maybe not as wide open as it was even 15 years ago.

 

Can anybody share their thoughts / experience with an event driven strategy?

 

The efficient market at work, truly.  Greenblatt exposed an area of the market that suddenly became popular, returns were driven negative as the trade became crowded.

 

Years ago (around 10) I was really into spin-off investing.  I hit some home-runs, and a few duds.  Both my best and worst investments were spin-offs.  One a hidden gem, another where the company was spinning out a pile of crap on the unknowing market.  I put together a spreadsheet of every spin-off in 2004 and 2005 and all an investor needed to do was invest in all of them and they would have beat the market.

 

Special situations are the trade de jour right now.  Every hedge fund is a special situations fund.  I'm not sure if spin-offs are completely dead yet, we need a good 5-10 years of negative returns before the opportunity comes back. 

 

I think the opportunity is probably in boring cheap stocks.  Everyone wants a platform, compounder, outsider ceo, or whatever else is popular.  There are not many people actually looking at low P/B, P/E, P/anything stocks anymore.  When this board is filled with people looking for low P/B stocks I'm going to start to look at spin-offs and compounders..

[valuechaser]

I hear you. Part of what drove me towards this area of the market is that despite working in a profession where I get paid to "forecast" I have very little confidence in my ability (and of most people's ability) to forecast and determine intrinsic value consistently. The whole idea of finding good businesses at reasonable valuations sounds great in theory but I know I personally have no shot at being able to identify these situations especially as thousands of other smart investors are trying to do the same thing.

 

Based on that, I've been looking at other investing styles where I can utilize my skill set (mostly patients to read detailed proxies, merger agreements, etc.) to see if I can spot anything that might be being ignored by the market. In many of these situations you are still required to forecast a value but your margin of error is potentially higher if the market sells these securities for reasons other than value (as identified by Greenblatt). I have no track record with these types of trades yet (only a couple of successful merger arb plays) but I hope this is a niche that fits my style of investing.

 

Also there doesn't seem to be a lot of good material (books, etc) devoted to special situations investing. Other than Greenblatt's book, and a few books covering merger arbitrage specifically (the most challenging area of event driven investing in my mind) I haven't come across anything that takes a deep dive into this area.

[boilermaker75]

I recently reread Greenblatt's book and am starting to dive back into more event driven type of investing. I'm surprised it's not discussed more often on this forum. It would be great to hear about people's experience with these types of ideas (spinoffs, merger securities, etc).

 

Greenblatt makes it sound very easy in the book and some of the case studies presented seem to suggest that institutional investors don't pay attention at all to these types of transactions (for example the highly publicized Viacom / Paramount transaction) but I don't think that's the case, at least not anymore. I still think there are opportunities in event driven investing but maybe not as wide open as it was even 15 years ago.

 

Can anybody share their thoughts / experience with an event driven strategy?

 

I occasionally will play a merger arbitrage. The way I do it is to write short-term puts on the company being acquired. That way every 1-4 weeks my play comes to a conclusion and I can re-evaluate. I don't do many, maybe 1-2 a year, because I don't have more time to spend on them. Maybe if I ever retire, they will become a larger part of my investing.

[winjitsu]

The spin-offs in Greenblatt's book, namely quick money from multiple reversion to the means definitely got a lot harder -- though they do exist...  example is last year's Babcock and Wilcox (see Gannon and Hoang's write-up here http://gannonandhoangoninvesting.com/blog/2015/9/10/boredom-is-a-good-friend-of-long-term-investors)

 

But I would disagree and say that there still is money to be made, you just have to think with a longer time-horizon. Spin-offs in general tend to outperform after a period of 3 years (see this paper http://www2.owen.vanderbilt.edu/alexeiovtchinnikov/Predictability%20of%20long-term%20spinoff%20returns.pdf). Looking back, there are quick a few spin-offs I wish I had gotten into earlier such as PSX, GGP etc.

 

For example, I've been spending time on:

• Dnow
  
• Pypl
  
• CFG
  

[Patmo]

I recently reread Greenblatt's book and am starting to dive back into more event driven type of investing. I'm surprised it's not discussed more often on this forum. It would be great to hear about people's experience with these types of ideas (spinoffs, merger securities, etc).

 

Greenblatt makes it sound very easy in the book and some of the case studies presented seem to suggest that institutional investors don't pay attention at all to these types of transactions (for example the highly publicized Viacom / Paramount transaction) but I don't think that's the case, at least not anymore. I still think there are opportunities in event driven investing but maybe not as wide open as it was even 15 years ago.

 

Can anybody share their thoughts / experience with an event driven strategy?

 

The efficient market at work, truly.  Greenblatt exposed an area of the market that suddenly became popular, returns were driven negative as the trade became crowded.

 

Years ago (around 10) I was really into spin-off investing.  I hit some home-runs, and a few duds.  Both my best and worst investments were spin-offs.  One a hidden gem, another where the company was spinning out a pile of crap on the unknowing market.  I put together a spreadsheet of every spin-off in 2004 and 2005 and all an investor needed to do was invest in all of them and they would have beat the market.

 

Special situations are the trade de jour right now.  Every hedge fund is a special situations fund.  I'm not sure if spin-offs are completely dead yet, we need a good 5-10 years of negative returns before the opportunity comes back. 

 

I think the opportunity is probably in boring cheap stocks.  Everyone wants a platform, compounder, outsider ceo, or whatever else is popular.  There are not many people actually looking at low P/B, P/E, P/anything stocks anymore.  When this board is filled with people looking for low P/B stocks I'm going to start to look at spin-offs and compounders..

 

Agreed 100%, but that is what value investing is by design, one will usually find themselves looking where nobody else is...

[mhdousa]

 

I think the opportunity is probably in boring cheap stocks.  Everyone wants a platform, compounder, outsider ceo, or whatever else is popular.  There are not many people actually looking at low P/B, P/E, P/anything stocks anymore.  When this board is filled with people looking for low P/B stocks I'm going to start to look at spin-offs and compounders..

 

Interesting thought. Do you know any good funds (mutual or hedge) that do well in the "boring cheap stock" space?

[winjitsu]

 

I think the opportunity is probably in boring cheap stocks.  Everyone wants a platform, compounder, outsider ceo, or whatever else is popular.  There are not many people actually looking at low P/B, P/E, P/anything stocks anymore.  When this board is filled with people looking for low P/B stocks I'm going to start to look at spin-offs and compounders..

 

Interesting thought. Do you know any good funds (mutual or hedge) that do well in the "boring cheap stock" space?

 

Michael Price (now running his own family office) and his former student Seth Klarman (Baupost -- read his letters from 1990s http://1icz9g2sdfe31jz0lglwdu48.wpengine.netdna-cdn.com/wp-content/uploads/2012/09/Seth-Klarman-Baupost-Group-Letters.pdf).

 

You'll see Michael Price filing form 4s and buying into microcap, low P/B companies from time to time, as well as thrift conversions.

 

It seems like the topic of discussion has expanded into all special situations, of which there are much more than just merger-arb and spinoffs. Another great book is Margin of Saftey by Klarman, where he goes into thrift conversions, index listing/delistings, and bankruptcies. There's another thread on this forum on tender offers.

[Aman1]

The efficient market at work, truly.  Greenblatt exposed an area of the market that suddenly became popular, returns were driven negative as the trade became crowded.

 

Years ago (around 10) I was really into spin-off investing.  I hit some home-runs, and a few duds.  Both my best and worst investments were spin-offs.  One a hidden gem, another where the company was spinning out a pile of crap on the unknowing market.  I put together a spreadsheet of every spin-off in 2004 and 2005 and all an investor needed to do was invest in all of them and they would have beat the market.

 

Special situations are the trade de jour right now.  Every hedge fund is a special situations fund.  I'm not sure if spin-offs are completely dead yet, we need a good 5-10 years of negative returns before the opportunity comes back. 

 

I think the opportunity is probably in boring cheap stocks.  Everyone wants a platform, compounder, outsider ceo, or whatever else is popular.  There are not many people actually looking at low P/B, P/E, P/anything stocks anymore.  When this board is filled with people looking for low P/B stocks I'm going to start to look at spin-offs and compounders..

 

I still think there can be value in "special situations". One of the main reasons is the institutionalization of money management that is making the markets, ahem, "more efficient".

 

As someone that works in it, I think that the fund management industry as a whole is now overly reliant on automated data gathering of company fundamentals, screening and (somewhat amazingly) sell side research views on companies. I think reading SEC filings is being neglected, and as management fees are cut by competition from ETFs, the fund management industry has less money to throw at analytical resourcing over time, creating a continually greater reliance on technology to fill gaps. In addition, the use of benchmarks to manage most active managers mean lots of time is spent only focusing on companies in the benchmark, rather than devoting much effort to under-the-radar stocks.

 

The great things about spin-offs (and let's not forget the parent left behind), M&A, post-bankruptcy stocks and other situations is that the automated data feeds (bloomberg etc) will be dark on these companies for at least a quarter - offering the enterprising investor some time to actually go through an SEC 10-12B filing and have an edge on the volume of slower  institutional money that won't look at it until it gets in the industry data systems and at that point might show up on a stock screen.

 

That said, going back to the Greenblatt book - his idea is straightforward imho. It is to buy above average return-on-capital companies at below average multiples. This framework is key when looking at special situations. While it might give you a small advantage over those that rely on data systems and don't read through SEC filings (a surprisingly high amount of institutional money in my view), it's still on you to decide if the spin-off makes sense on RoC and valuation.  The same applies for looking at these metrics for the parent left behind in a spin-off or for a assessing a company after a merger goes through and the merger arb guys get out of the stock. There has been a spate of spin-offs in the US at unattractive valuations; so while you have informational advantage, they just haven't been interesting. Some will still creep through though - i doubt that you'd lose much money buying Associated Capital Group (AC), despite it being a Q415 spin-off, for example.

[winjitsu]

Came across the chart below recently...  the number of spin-offs has been very consistent, but the number of people in the game definitely has increased drastically so I don't think you'll be seeing event-driven funds making 30%+ annual returns anymore. Greenblatt and Klarman definitely made most of their money in the 80s and early 90s.

 

http://cdn2.hubspot.net/hubfs/123605/images/Spins_per_year_2016.png?t=1464109805414

[tallpop]

I'm in the midst of one right now- Delll {Private co now)  purchase of EMC.  Huge deal- and now Dell got the funding. 

For my troubles, I get probably 20% for a six month holding of EMC stock.  Dell is paying 24.05 cash plus .111 of a tracking stock of VMWare that will be worth about $7.  So 30-31 bucks total.

 

There was some concerns about the financing but Dell paid up (higher interest) to ensure the deal got done, I guess.  They were surprised at the level of response from the market, and upped their financing requirements to $20B from $16B, as the bonds were over-subscribed.  I am hoping they buy the tracking shares with this extra money.

 

I bought in a couple weeks ago for just over $26.  The stock is over $27 now.  I figured the deal would be completed in the summer, and for sure by October, and since there were heavy penalties on both sides, there was little chance the deal fails. 

 

That's quite a bit of work for 15% return, but it looked safe enough.  And it will be less than 6 months...I am thinking those tracking shares might be a good idea too...

Victor

[Aman1]

I took a look at the Dell bond issue when it came so did some work on this, but nothing too substantial it has to be said.

 

One of the things that stood out when looking at the debt security package was trying to establish a market value for the tracking stock.

 

The VMWare tracking stock will be a share class of the main Dell LBO vehicle, so you are not only tracking the underlying main VMW equity listing, but you will also have to price in a discount based on the credit risk of the Dell issuing entity. This is a business that has out-of-the-box leverage of around 5x with comparable EV/EBITDA's of around 4x in the space.

 

Also, the upsized bond deal led to a 1:1 reduction in the bank loan financing - i.e. total secured debt issued remained the same, with the mix of bonds increasing.

 

Longer term I suspect they look to buy in the tracking stock, but the short- to medium-term intention has to be to de-lever the business to a point where it has equity value.

 

These are just my 2c - to be fair, this view was based on a cursory assessment rather than a prolonged deep dive.