Spin
offs
Institutional
investors are usually sellers when the stock is spin off and it is not based on
investment merits but because of the spin off small size.
Insiders
want the spinoff(are the managers of the new spinoff incentivised along the
same line as shareholders, will they receive their compensation in the spin off
stocks. Checked up on the compensation package.)
Institutions
don't want the spinoff.( take note of high illiquid stock price during spin
off).
A
previously hidden investment opportunity is uncovered by the spinoff
transaction. (A cheap stock, a great business, a leveraged risk/reward
situation).
As a general rule, if
institutional investors are attracted to a parent company because an
undesirable business is being spun off, they will wait until after the spin off
is completed before buying stock in the parent. This practice relieves the
institution from having to sell the stock of the unwanted spinoff.
That's why, if the parent
company appears to be an attractive investment, it is usually worthwhile to buy
stock in the parent before the spinoff takes place.
Partial spinoffs
Once the stock of the partial
spinoff is publicly trading, you are able to place a value on those shares. By
doing that, you now know two things. You know how much is the remaining stakes
of the partial spin off co in the parent company and you know the value the
market places on all the rest of the business.
Rights
offering
Anytime
you read about a spinoff being accomplished through a rights offering, stop
whatever you're doing and take a look.
One
telltale sign of a bargain offering price is the inclusion of oversubscription
privileges in a rights offering. When oversubscription privileges are involved,
the less publicized the
rights
offering, the better the opportunity for insiders and enterprising investors to
pick up spinoff shares at a bargain price.
Merger
securities
Merger
securities are usually sold without regard to the investment merits.
Institutional investors are not even allowed to hold these sweeteners used
during a deal. Everyone who receives these merger securities are most likely
going to sell, and this presents a buying opportunity. Good to take a look at
areas which people don't usually see.
Restructuring
Tremendous
values can be uncovered through corporate restructuring.
The
most clear-cut restructuring opportunities are the situations where companies
sell or close major divisions to stanch losses, pay debt and focus on more
promising lines of business. By selling the loss making division, the earnings
of the conglomerate will rise, increasing the eps. The sale of the loss making
business can result in positive net proceeds, making the investment opportunity
more compelling.
The
sale of a major division may create a more focused enterprise and investors are
willing to pay a premium for more specialised and profitable operation.
Look
for situations that have limited downside, an attractive business to
restructure around, and a well incentivised management team.
In
potential restructuring situation, look for a catalyst to set things in motion.
Make
sure the magnitude of the restructuring is significantly relative to the size
of the total company.
Bankruptcy
Unwarranted
selling from the new shareholders of a company that has just recently emerged
from bankruptcy. Since the new stock is issued to banks, trade creditors, it
makes sense that they have every reason to sell as soon as possible.
An
otherwise good company maybe forced to file for bankruptcy is to protect itself
from lawsuits. If the lawsuits can be settled within the bankruptcy process, a
very viable company can re-emerge.
A
company can make it out of bankruptcy by shedding unprofitable business line
while banking its future on one or two profitable divisions with attractive
prospects.
Unless
the price is irresistible, only invest in companies with attractive business.
Stub
stock- the equity stake that remains after the company has been recapitalised.
Investing
in a stub stock is like investing in the equity portion of a LBO.
There
is a tax advantage to having a leveraged balance sheet.
A
modest 20% increase in pretax earnings can lead to a potential of an 80% gain.
With pretax earnings exceeding its interest expense more comfortably might
result in a huge PE ratio.
Cash is easy to see on the balance sheet, but that is not the end of your analysis. You have to determine what will happen to the excess cash.
Side
note
Form
8k is filed after a material event occurs such as an acquisition, asset sale,
bankruptcy, or change in control.
Form
10 is the form used to supply information on a spinoff distribution.
Form
13d is the report where owners of 5 percent or more of a company must disclose
both their holdings and their intentions regarding the stake.
It
all boils down to a simple two-step process. First, identify where you think
the treasure is, then you start to dig.
