Activist investor-induced spinoffs: Are they worth it?

 

Photo courtesy of Seth Dodson on Flickr

Photo courtesy of Seth Dodson on Flickr

Rob Swystun, Pristine Advisers

Spinoff companies can often be a letdown to activist investors who push for them, according to a new study.

Consulting firm (and not-U2-guitarist) The Edge and accounting firm Deloitte looked at 385 global spinoffs between January 2000 and June 2014 that involved parent companies with a market capitalization of $250 million or more and found that, as reported by CNBC’s John Jannarone, over one third of the spinoff companies failed to deliver any value past their first year of existence.

“Investors will be surprised to learn that 4 in 10 spinoffs don’t generate any value over year one,” said Ryan Mendy, COO of The Edge consulting group.

To qualify for the study, the transactions needed to be pure spinoffs with shareholders of parent companies receiving shares of the newly-listed companies.

Whether in up or down markets, 38% of spinoff company stocks deliver a negative return one year after listing.

What makes this especially significant is that it’s investors themselves that often push for companies to split. eBay and PayPal are one example that Jannarone gives of companies that have been pushed toward splitting by activist investors (Carl Icahn in this case). Both Hewlett-Packard and Barnes & Noble birthed spinoff child companies after shareholders prodded them to do so.

Although the survey doesn’t specifically talk about how long activist investors hold onto the shares of spinoff companies they push for, it does reveal that pushing for those spinoff companies may not be worth it.

Of all the spinoff companies included in the study:

  • 56% had negative returns one-month after demerger,
  • 47% after three months, and
  • 38% after one year.

Risks

One potential issue is people foregoing the available information about spinoff companies.

Investors don’t always read through financial details thoroughly and only after they go public do people stop and think about concerns with the company (and they usually get that information from other reports rather than the filings).

“Investors can easily get excited about an activist getting what he wants and not pay attention to the details,” Menday said.

That risk of a weak stock performance can also be shared by a parent company after a spinoff, with the study showing 37% of parent companies seeing declines in stock prices in the year post-spinoff.

It’s not all doom and gloom for spinoffs, though. Forty-four percent of spinoff companies had share-price returns of greater than 20% after one year and the aggregate numbers actually came out quite strong. The average spinoff company generates a return of 22% after listing while the average performance over the first year for parents was 14%.

The study shows that spinoffs have increased dramatically over the past five years with the total value of companies that completed break-ups in 2010 sitting at $131 billion and rising to $664 billion in 2014. That will likely rise to $775 billion or more in 2015, (based on deals already announced.) The study also found that value creation wasn’t dependent on economic growth or company coverage by analysts.

With those kinds of numbers, it’s not surprising that spinoff companies are on the rise. But, is it worth it to investors to have these splits happen or are activist investors’ egos getting too big and they just like the feeling of power of having brought about major change without considering whether it will be a good thing? Something to think about next time you hear about a company splitting off from a parent.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s