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Some New Evidence that Spinoffs Create Value

This study explores how corporate spinoffs create value by allowing subsidiaries to operate independently from their parent companies. By divesting a subsidiary, companies can enhance managerial accountability, leading to improved operational performance. The research indicates that spinoffs positively impact both the spun-off entities and their parent firms, with significant growth in key financial metrics such as operating income and net sales following the separation. Furthermore, the study highlights increased market performance and takeover activity among spinoff companies, signaling enhanced corporate focus and efficiency.

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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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