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Some New Evidence that Spinoffs Create Value

Some New Evidence that Spinoffs Create Value. By: Hathaiwan Vongsuwan Hengmin Zhang Jonnell Tyler Jose Navarrete Kamoldis Theamkachit. What is a Corporate Spinoff. A form of divesting a subsidiary (IRS 355 compliant) Only way to divest assets on a tax-free basis

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Some New Evidence that Spinoffs Create Value

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  1. Some New Evidence that Spinoffs Create Value By: HathaiwanVongsuwan HengminZhang Jonnell Tyler Jose Navarrete KamoldisTheamkachit

  2. What is a Corporate Spinoff • A form of divesting a subsidiary (IRS 355 compliant) • Only way to divest assets on a tax-free basis • Provide no inflow of capital • Grant complete operational decision-making authority to the subsidiary’s management team

  3. Sources of Value: Inefficient Markets or Managers • Market’s inability to evaluate conglomerate structures with unrelated businesses • Spinoffs allow their shares to trade separately and enable investors to value more accurately. • Improvement of managerial accountability and incentives • Separate stock price for spun off company provides more visible and objective criterion for evaluating managerial performance.

  4. The Effects of spinoffs on Operating Performance • Poor performance before spinoffs • Substandard Operating performance • Post-Spinoff Consolidated results are better • Positive growth in Operating Income, Net Sales, Capital Expenditures • Enabled parent firm to improve as well • Spun-off Subsidiaries are greatly improved • Rapid growth in all key accounting variables

  5. Effects of Spinoffs on Operating Performance Adjusted growth rate, meausring 1 yr. before the spin-off and 3 years after spin-off • Parent companies • Net Sales 10% • Operating Income 10% • Subsidiaries • Net Sales 15% • Operating Income 24%

  6. Takeovers of Spun-off Firms • Improving corporate focus • Synergy in business practices • Correlation between Stock Returns and Operating Improvements

  7. Overall • Parent Firms exhibit substandard performance prior to spinoffs, but improve above average after. • Faster growth in sales, operating income, return on sales, total assets, and capital expenditures. • Over 2-year period, average parent company stock price outperforms market by 35% • Spinoff company and parent company’s stock returns outperform the market. • More takeover activity amongst spinoff companies. • Cohesiveness is created amongst spinoff and parent company after takeover. • More decentralized market-based capital allocation process. • More accountable, focused management.

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