What makes a spinoff attractive? After picking this as a place to put my money, I need to understand what makes this type of investment valuable. This post has the simple basic rules that make spinoffs attractive as an investment vehicle.
Institutions are motivated to dump the shares
Institutions (mostly mutual funds) are motivated to dump the shares of a spin off for a number of reasons: the size of the company is smaller than the minimum value the mutual fund can purchase or in an industry that the institution does not participate in.
Insiders are motivated to keep the shares
Management, and other wall street insiders are making sure that they get a cut of the new company’s shares. These deals are typically disclosed in the SEC Form 10/12B. Look for sweetheart deals that major investors are making for their interests.
The company becomes relatively cheap to purchase
The spin off provides an inexpensive company to purchase as a result of the spin off. As institutions bail on the new company, the stock price can suffer providing a great opportunity for investment.
The company is a a great business that is only realized after the spin off
Sometimes the spin off company’s attractive investment was being dragged down by the parent. This is particularly noticeable with spin offs created in entirely new industries.
The company provides a new leveraged risk reward situation
The new leverage is appropriate for the spin off’s industry but was inappropriate for the parent company’s industry making a new valuation model more useful and effective. As a result, the new companies will be better valued like their peers. This can happen when the two industries are starkly different.