Looking to add an investment to your portfolio, you consider bonds but don’t like the low return. Index investing will get you a market return, but you want something higher. Maybe spin-off stocks, but are spin-offs good investments? If you want to know, read on …
Are Spin-Offs Good Investments?
Yes, spin-offs are good investments because of unlocked value, business focus, management focus, outperformance potential, strategy adaptability, and transparency. Are spin-offs good investments? is an astute question and here’s why:
Unlocked Value – The corporate action of a spin-off can unlock the hidden value of an undervalued subsidiary. Oftentimes, the market does not recognize the value of a division overshadowed by its parent company. A spin-off can lead to renewed investor interest and higher market revaluation.
Business Focus – Spin-offs allow the new firm to concentrate on their core business. This dedicated focus leads to increased operational efficiency in pursuing strategy initiatives, renewed market segment focus, and enhanced organic growth.
Management Focus – As an independent entity, spin-off management can concentrate on the specific mission, vision, and strategy germane to their niche business. Gone are the large corporation’s managerial distractions and convoluted hierarchy. The standalone team may react quicker to market changes and oscillating client preferences.
Outperformance Potential – Spin-offs can outperform the parent firm and broader market over the long term. Released from parent company restraints, refocused growth opportunity pursuits, and quicker market adaptability allows the firm to attract new clients and investors.
Strategy Adaptability – Spin-offs are usually more agile than their parent firm. This nimbleness leads to a quicker decision-making process, increased profitable project participation, and enhanced shareholder value. Spin-off investing provides an event-driven investor’s portfolio diversification and strategic flexibility.
Transparency – The new entity is required to file separate financial statements and periodic disclosures. Transparency begets greater shareholder accountability. Management teams dedicated to heightened fiscal visibility are more focused on driving stakeholder value.
Are spin-offs good investments? Yes, spin-offs are good investments with the potential for market outperformance. This event-driven investment’s propensity for improved initiative focus, streamlined efficiency, strategic agility, and new transparency and accountability are the reasons for its above-average return potential.
What Happens to My Stock in a Spin-Off?
What happens to your stock in a spin-off is you receive spin-off shares or cash payments, you may experience tax implications, there will be a market effect on your parent company shares and you can continue your parent share ownership. Here are the possible scenarios:
Receipt of Spin-Off Shares – As a parent company shareholder, you will receive spin-off shares. The shares will be distributed on a pro-rata basis.
Receipt of Cash Payments – You may receive cash payments in lieu of spin-off shares. This may occur because of tax or regulatory requirements or based on the terms of the transaction.
Taxable Event – Jurisdiction and spin-off transaction terms and conditions may trigger a taxable event. The prudent investor consults a tax professional prior to the receipt of any disbursements.
Market Effect on Parent Shares – Post spin-off, your parent and spin-off shares may experience market volatility because of investor uncertainty going forward.
Are spin-offs good investments? Yes, spin-offs are good investments. All investing contains risk and spin-offs are no exception. Thorough quantitative due diligence and an understanding of the firm’s qualitative strengths and challenges must be part of any investment decision process.
Read next: What is the Cost Basis of Spinoff Shares?
