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How to invest in a spinoff deal Add to ...

Corporate spinoffs are back in style among companies looking to give their share prices a boost – or “unlock” value. According to Bespoke Investment Group, there were eight spinoffs of $100-million (U.S.) or more in the final quarter of 2011 alone. Expedia Inc. spun off TripAdvisor Inc. and Marriott International Inc. spun off Marriott Vacations Worldwide Corp.

But the big question is whether these attempts to unlock value actually work, giving investors a reason to buy into them. Bespoke crunched the numbers on 132 spinoffs valued at $100-million or more going back to 2001, and found that these deals certainly give investors an interesting ride.

When a spinoff is announced, the stock rises an average of 6.8 per cent by the time the deal is completed. Then, after the spinoff is done, both parent and child stocks tend to fall in the near term: The child stock falls an average of 3.4 per cent in the first week.

“One possible explanation for this decline is that in most cases, the child stock does not fit into the same style as the parent company, so many managers will immediately sell the new stock to avoid deviating from their predominant style,” Bespoke said in a note.

Three months after the spinoff, things shift though. The child stock rises an average of 5.2 per cent while the parent stock falls an average of 1.3 per cent. Six months and one-year after the deal is completed, the child stock also outperforms the parent stock.

The conclusion for investors: Avoid parent stocks, and instead invest in child stocks about a month or so after the deal is completed.

“By waiting, investors will not be subject to the initial selling that inevitably takes place as existing shareholders sell shares of the child stocks that may not fit in with their investment criteria or guidelines,” Bespoke said.

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