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Ideally, if a company had a division
it wanted to get rid of, the parent firm would sell the subsidiary and
reinvest the proceeds in the core businesses it retained. There's just
one catch taxes. If the subsidiary is carried on the books at a price
way below its current market value, the sale could generate big
capital gains. To avoid a bill for capital-gains taxes, many companies
often use another technique to rid themselves of a division: they
spin it off'. This means that the parent firm restructures the
subsidiary as an independent company with its own stock; then they
give those shares to current investors in the parent firm.
This may seem like an awfully
convoluted way for a company to shed a business it doesn't want. But
spinning off assets can be a winning corporate strategy if it is done
shrewdly For instance, when abet announced its plan to break itself up
into three separate companies in September 1995, the stock jumped $6,
or about 10%, on the news. Here's why investors applauded: The main
company consisting of long-distance and cellular telephone
service-would be leaner and more competitive', AT&T's telephone
equipment division would be freed to seek business from a wider range
of clients', and the troubled computer division would be oft-on its
own, where it would either be turned around or possibly bought by
another computer firm.
Apart from the strategic value of
splitting up a giant company, there can also be big financial
benefits. The parent firm can spin off-the subsidiary's liabilities
along with its assets. If the subsidiary is heavily indebted, that
alone can spiff up the parent company's balance shorthand if top
managers are clever, they can sometimes find excuses for loading some
parent-company debt onto the subsidiary before they let it go.
Further, a opinion can qualify for tax-free status if 80% of the
subsidiary is distributed to shareholders. That means the parent
company can pick up a little extra cash by selling 10% or 15% of the
division to the public a year or two before spinning it off'.
SPECIAL SITUATIONS
These funds attempt to match an
existing stock index, such as the S&P by holding most of the stocks
that make up the index.-they can't afford to hang on to odd
stockholdings that might throw off their performance numbers. The
result: In the month after a spin-off's stock is distributed to
investors, there's a wave of selling that temporarily depresses the
share price.
Longer term, though, spin-off's can
shine. After the initial selling subsides, a new stock usually
rebounds. In addition, the company's performance may improve sharply.
Subsidiaries are often spun off- because they aren't especially
successful businesses. But once the managers are on their own, without
interference from headquarters, they may be able to make the company
more profitable. In brief, investing in spin-offs boils down to two
cases: If you own shares in a company that announces a spin- off,
decide whether you'd rather own the new stock or cash out as quickly
as possible. To decide whether to keep the new company, you'll need
some brokerage research that specifically analyzes the upcoming
spin-off. If you plan to hang on to the shares, be prepared to hold
them for at least a year. lf you'd rather convert them into cash, try
to avoid selling immediately after the shares are distributed. In some
cases you can sell on a when- issued basis.-that means agreeing in
advance to sell the shares at a specified price when they are
distributed (you can find out from your broker when when-issued
trading will begin). If you don't think the when-issued price is
attractive, hold the stock for two or three months to see if it
rebounds once initial selling dissipates. |
