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Spin offs are popular, but they can also be dangerous

Jun 8, 2022

Redacción Mapfre

For investors, spinoffs—turning a division into a publicly traded company by issuing newly created stock—can unlock value. Theoretically, it allows the pieces of a corporation to trade at higher valuations than they do trapped inside the company, where they might not fit together properly. In practice, they can be complex, and in some cases, detrimental to long-term shareholder returns.

“Everyone thinks spinoffs are an easy way to make money, and they’re not,” says Jonathan Boyar, CEO of Boyar Value Group, in an article in Barron’s. “You have to be very careful and outline the different things to look for to see if a spinoff is attractive.”

Boyar has a point. For activist investors, spinoffs can bring substantial gains. A 2019 study by the Boyar Value Group analyzing nearly 250 spinoffs over a 10-year period found that a spinoff’s largest returns happened between seven and 12 months, reaching maximum returns of 7.1% after one year of completion. Long-term investors do less well, as returns tail off after that, with the average spinoff in Boyar’s study underperforming the S&P 500 by 2.7% a year on average.

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Records, risks, and reasons for caution (and optimism) in the markets

In the third quarter, U.S. equities extended their post liberation day advance, especially in the case of small caps.

How to invest with the stock market at maximums?

We are facing a high price scenario, in which questions for investors arise: Should one enter a market that is already “expensive,” or wait? Should you hold your investments, or is it time to sell? MAPFRE experts explain that being in a moment when stock markets are at record highs should not deter investment if we have a long-term outlook—the most suitable for retail investors—and good diversification.

Fed Highlights “High Prices” in Equities: Are We Facing a Bubble?

The U.S. Federal Reserve has dominated much of the economic and financial discussion in recent weeks, largely due to the debate over possible rate cuts, which were confirmed last week. On Tuesday, Chair Jerome Powell again drew attention by referring in a speech to the “fairly high” prices in U.S. equities. With Wall Street at historic highs, the question arises whether we are dealing with an equity bubble.