Performance Characteristics of Spin-Offs
Historical Performance of Spin-Offs
RYAN CASEY: The research that we've done, which goes back to the mid-1990s, and the academic research that's out there, which goes back to approximately the 1960s, have all shown that a basket of spin-off securities, both in the U.S. and internationally, has outperformed the market over a multi-year time period/
What Phase of the Life Cycle is Most Important?
CASEY: I think many investors may be familiar with a spin-off's short-term investment prospects, which entail the forced selling and early opportunities in the spin-off's life cycle. What few people may be aware of is how long the fundamental improvement story lasts in the spin-off lifecycle. Once a company is independent and able to pursue its own strategies, there can be a significant amount of revenue growth. Companies are often allowed to right-size their headcount and expense structure in a very meaningful way, leading to very meaningful margin improvement in earnings growth. Often if a company is perceived as not as efficient as its peers or growing slower than them, it may initially start trading at a lower multiple. Once those improvements start to kick in, however, there may be a significant amount of multiple expansion as well.
SALVATOR TIANO: Historically, a large portion of the return from spin-offs has come from a limited number of transactions. It's similar to the eighty-twenty rule in that a small number of spin-offs may deliver the majority of the returns in the space. Therefore we're trying through international diversification to cast as wide a net as possible to make sure that we invest in the spin-offs that will deliver the greatest outperformance.
Impact of M&A on Spin-Offs
CASEY: Another part of the potential return in spin-offs historically has been the propensity for them to be acquired at a relatively high rate. Based on our research going back roughly 12 years, we have found that 10% of spun-off companies have been acquired in their first five years of life as an independent company at premiums of roughly 20%. It's also interesting to note that in the U.S. there are restrictions on M&A activity for a period of up to two years once the company is separated. For those reasons it's very important to have exposure to spin-offs in years three, four, and five.
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