Spinoff Returns

[no_free_lunch]

Negative alpha in spinoffs lately.

 

Spinoffs underperformed their industry sectors by 5% on average between 2011 and 2015, according to the analysis. That compares with an average over-performance of 30% between 2001 and 2005, and 19% between 2006 and 2010. The study examined returns for the parent company from announcement to deal completion and returns for the spinoff and the remaining entity two years after the transaction closed.

..

Units spun out of diverse conglomerates often do well, because they can finally get the specific attention they lacked while wedged inside a bigger company, he explained. It’s more difficult to find such inefficiencies in more homogenous companies.

 

https://blogs.wsj.com/cfo/2017/05/18/spinoffs-deliver-less-bang-citi-analysis/

[Gregmal]

Eh, I think this is largely just because of where we are in the perceived cycle. Companies are getting desperate for returns and there seems to be more of a "throwing shit at the wall" approach being made by companies to appease investors.

[racemize]

This article is actually a little annoying as I'm much more interested in the returns of the spun out company than the combined one. 

[no_free_lunch]

This article is actually a little annoying as I'm much more interested in the returns of the spun out company than the combined one. 

 

True and good point.  However if the methodology has been consistent there were incredible returns 2001-2010.  So I think there is some merit to the study.  It would be nice though if they split the returns out between parent and spin company.

 

Just food for thought and it reminds me not to take any strategy for granted. 

 

EDIT:

 

The Claymore Spin-Off ETF (CSD) out-performed the market considerably 2010-2015.  +136% vs +80% for SP500.  So perhaps the spin-off game is still intact.

[racemize]

Right, I think spinoff probably works all the time generally, and if it had just been the spun out ones it might have worked recently too.  So not a bad data point, but I think it is introducing some noise that isn't helpful.

[JayGatsby]

This article is actually a little annoying as I'm much more interested in the returns of the spun out company than the combined one.

Even in that case I also don't think it's necessarily representative to look at the total returns from investing in either of the spin. I've usually invested in only one half, but sometimes have invested in the parent when it looked like they were spinning out the bad assets. Cash America is the best example that comes to mind, when they spunout their online lender. Despite the amount written about investing in spinoffs these are still sometimes overlooked.

[racemize]

Yeah that's definitely true as well. Mostly, just a good spot to look.

[LightWhale]

This article is actually a little annoying as I'm much more interested in the returns of the spun out company than the combined one.

 

See the original research paper attached, with a breakdown of returns for the parent and spun-off company.

City_Group.pdf

[racemize]

Ok, so neither subset was positive. Thanks for posting.

[LightWhale]

BTW, papers by investment banks are not the most unbiased pieces of research out there. It's marketing, as they make money from leading the spinoff process with the company, and promoting investors to trade on the other hand.

 

In contrast, results from academic research are rather ambiguous. The original research which Greenblatt based his chapter on was shown by Fama to be methodologically inadequate. Bottom line: individual spinoffs are always worth a look, since they often involve some informational gap and inefficiency, but a basket of them might be less of a great idea.