A company interested in enhancing shareholder value may spin off a portion of its assets to current stockholders by creating a new public entity. In this situation, the common stock of the newly spun off company may trade temporarily at a substantial discount to its intrinsic or private market value, as Wall Street analysts may not immediately follow the new entity. In addition, the share price of the spun-off company may initially be depressed due to forced selling by shareholders of the parent company. Those stockholders may not be interested in the new firm, or their investment mandate may prevent them from taking a position in a smaller company. However, newly focused “pure play” companies often perform well and receive more coverage than they did when they were part of a larger conglomerate.
Companies emerging from bankruptcy are also fertile sources for us to uncover undervalued situations. Often times, these companies trade at attractive valuations due to both a lack of Wall Street coverage as well as the stigma associated with being involved in a recent bankruptcy situation.
View a Boyar Research case study on spinoffs.