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, managing director of Boyar Value Group. “You have to be very careful and outline the different things to look for to see if a spinoff is attractive.”
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. Other ways of measuring returns show similar results. The S&P U.S. IPO & Spinoff Index, for instance, has returned a 31.9% loss over the past 12 months.
Perhaps that’s why most activist investors don’t stick around that long. Funds often hold spun-off stocks for less than a year and a half before selling and moving on, said John Coffee, professor of law at Columbia University Law School. “That’s a short-term kind of strategy—to take over, do the separation, realize the gain and move on to focus the proceeds on another company,” Coffee says.
Spinoffs can go wrong in many ways. In some cases, the spinoff might be too intertwined with the parent to result in a clean cut, resulting in a process that can take years, not months. Johnson & Johnson (JNJ), which announced its spinoff in November, has said that it could take up to the end of 2022 or early 2023 to execute the separation of its consumer healthcare division.
Even if a spinoff is feasible, it could be more expensive than expected, or the spun-off companies may be too small to survive on their own. Sometimes, spinoffs can fail if the parent company uses them as a way to unload debt, which could end up hurting the new company.
Oftentimes, a separation that looks good on paper can clash with the “cold, hard reality of life,” says Kai Liekefett, partner at Sidley Austin in New York who chairs the law firm’s shareholder activism practice.
“Investors should watch particularly how movements of cash and debt in spinoff transactions affect the balance sheets of the two companies post-spin.
Insights article warns: The most common claims that arise out of spinoffs are for breach of fiduciary duty and fraudulent transfer, although claims alleging unlawful dividends, violations of the securities laws, preferential payments, recharacterization, equitable subordination, and substantive consolidation, among others, also can be asserted. Of course, ntar would never do such bad things.
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