Opportunities in Corporate Spinoffs
By Yoav Sharon
After a quiet 2017, which registered the lowest count of spinoffs in the current bull market, 2018 has again become a fruitful year for corporate spins activity.
Exhibit 1: 2017 Registered an Abnormally Low Count of Spins Offs
Historically, spin offs have outperformed the broader market, as corporations are able to simplify their structures and eliminate non-core business segments, while gaining exposure to a new, dedicated investor base.
Exhibit 2: Bloomberg US Spin-Off Index vs. S&P 500
Generally, however, the corporate action does not come without some drawbacks. Namely, the shareholder investor base has to turn over, prospective investors need to get up to speed on the new business line and ultimately gain familiarity and confidence with the SpinCo (spin-off company) management.
These issues often lead to an initial turbulent period that causes outsized moves as the dust settles. As 2018 has seen an uptick in corporate spins, many of these have followed the traditional playbook. Exhibit 3 provides a walkthrough of the type of opportunities found in corporate spins, as investors digest these ‘new’ companies and surrounding dynamics.
In order to navigate SpinCos, investors can follow key signals that strengthen the opportunity set: Are key members of management heading to newly created company? Is the management team properly incentivized both near and long term? What sort of factors might cause stranded costs to balloon, thereby impairing immediate performance?
Once properly dissected and understood, SpinCo investments can provide unique opportunities to capitalize on changing corporate structures. Given the long term outperformance of spins, we would anticipate these setups to continue.
Exhibit 3: The Corporate Spin-off Journey
This information is not intended to provide investment advice. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, market sectors, other investments or to adopt any investment strategy or strategies. You should assess your own investment needs based on your individual financial circumstances and investment objectives. This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC (“Driehaus”) as of September 2018 and are subject to change at any time due to changes in market or economic conditions. The information has not been updated since September 2018 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this information. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.