News & Press
By Antonella Ciancio / Global Finance:
Large companies around the world are breaking off pieces or breaking up in record numbers. Will the boom last?
Global conglomerates from the Americas to Europe to Southeast Asia are slimming down and muscling up to address activist investors’ demands for higher returns and improved operational performance—and, perhaps, to cash in before the decade-long bull run in equities peaks.
“Over the 10 years that we’ve been analyzing spinoffs, the bulk of activity in corporate breakups has been close to the bottom or near the top of an economic cycle,” says Jim Osman, CEO of The Edge Consulting Group. “While we are not calling the top of the market right now, we believe that the value in a lot of companies has been realized; and in order to provide even greater value, corporates as well as the activists we advise are examining ways that this can happen. Spinoffs are great for giving shareholders that.”
Soaring markets and the rise of shareholder activism have compelled companies to plan spinoffs at a rate unseen since at least 2008. There’s no end in sight for the frenzy as these new stocks keep finding ways to beat the market. More than 100 companies this year have announced plans for spinoffs on U.S. exchanges, a 54 percent increase from the same time last year, according to data compiled by Bloomberg. This momentum could continue regardless of how the broader market performs, according to Jonathan Morgan, a deals analyst at The Edge Consulting Group.
The Edge held the very first Spinoff conference in NYC on Wednesday, June 6 at the exclusive Penn Club on 44th St. to a packed room. With almost 100 money managers, The Edge debated where, if any, Spinoffs make money. The event was non-profit, and all donations went to the Alzheimer’s Association. We are proud that, together, we raised $5,500.
It was a great experience, and the thing I liked personally was that everyone was a winner. The charity had gained some much-needed funds, the audience got some great ideas and some fantastic food, and perhaps we can gain some new partners to help.
Benjamin Franklin said there were only two things certain in life: death and taxes. Some things may be obvious, but not quite certain. Insider selling is one of those in my opinion. As markets and companies become more in-line with fair value, it can become much harder to extract value from companies, particularly with the shift and impact in technology, governments, regulatory changes and the general environment. This can give rise to a few different variables that I’ve seen affect executives over time. Sometimes, this motivates them to do something with the company for the good of the shareholder.
Here is what I think. There are two things certain in the investment world that you cannot spot until much later: Selling by insiders who know bad news is coming or executives straight up cooking the books.
Most of you well know that I have been calling the death of the big banks for years. They are institutions that are beyond their sell-by date. They kill you on fees and are just not a part of this new world where everyone wants to see the value before they pay a dime. Even down to everyday stuff, you are forced to pay what they demand in terms of banking charges.
Having said that, times are changing. Spotify, the digital music and video streaming service, is coming to the market in an unconventional way – very similar to a Spinoff, and that’s why I like it. The non-IPO as it’s being called won’t be offering new shares to investors, it won’t be constrained by a lock-up enforced by underwriters, and it won’t be marketing its offering behind closed doors to a select few. Result? A Spinoff-type situation that is very under-covered. It’s under-covered because the big banks aren’t making any money out of it!
I got a tremendous response two weeks ago in my letter entitled What is a Spinoff?, where I outlined three of the most important points to look for in a Spinoff investment. I’m glad it helped clarify this obviously profitable but difficult to navigate area. This week I thought I’d detail how The Edge defines a special situation.
So how do we go about looking for that opportunity and what exactly is a special situation in our eyes? Well, I’ll tell you what it’s not. We don’t look at risk arbitrage. Other than that, anything that appears to display some sort of hidden value away from the naked eye (and robots) and that requires our expertise and intelligence in realizing the investment opportunity is fair game.
I used to say to people, “I don’t know what is going to happen. I don’t have a crystal ball.” It was probably the right thing to say 10 years ago, but today, our client partners and your investors (if you have any) are essentially paying you to have that skill and expect it! Quite a feat. We will return to this a little later.
In the meantime, this newsletter goes out to tens of thousands of people, and to be honest, I don’t really know who most of you are. However, my last newsletter touched on why you need Spinoffs in your portfolio. On the back of that, I received many emails asking if I could concisely explain what a Spinoff is, so I’d thought I’d lead this week with exactly that.
Almost every investor is a winner in a rising market. Why? Well, primarily two reasons. The natural inclination for most investors is to buy stocks (rather than shorting) and, as you well know, a rising tide lifts all boats. Easy money if the market compounds at +19% per year. The ETFs and all your picks that just follow the market up will make you money. Guaranteed. Look at you, you are a stock picker! Great job, give yourself a pat on the back.
You could possibly be in an underperforming situation this year if you decide just to buy and hold stocks without any sort of catalyst to make them move higher (assuming you are investing from the long side). It’s much the same on the short side.
Had a rough time last year? Beat the index? Maybe you spent December thinking up excuses as to why you didn’t? How did your letter to investors start? With an apology?
Hold on. Stop and think for a second. What exactly is your investment strategy and do you really believe in it? I mean REALLY believe in it. Is it dynamic enough?
As regular readers of our monthly’s know, I’m a fan of cycles and cyclicality. My whole (albeit tiny) view of the world is based on cyclical movements. Ever wonder why sometimes things get good and then you feel down? Perhaps that holiday feeling after you have been away, or perhaps the day after a big occasion, or even a relationship? The chances are it is to do with the cycle you are currently in.
I take this approach to investing. Not only on a macro view, but also on a stock view. For example, the market is clearly on the familiar 10-year cycle. It goes up and you buy the dips. For me, the top of the market is characterised by a few things.