Spin offs are popular, but they can also be dangerous
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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