Since Lucent Technologies is one of the most widely held stocks in the country, chances are good that a lot of BUYandHOLD customers have received shares in Avaya, an entity spun off by Lucent. Shareholders have received one share in Avaya for every 12 shares of Lucent they own. Avaya, which spun off September 30, trades on the New York Stock Exchange under the symbol "AV."

Avaya represents Lucent's former Enterprise Networks Group. The company provides a variety of communications systems primarily for businesses and government agencies. Products include voice and data management products, messaging services, and cabling systems.

Should Lucent shareholders keep Avaya? This business has hardly been a big growth area for Lucent, which is one reason the company spun off the unit. Still, such "uninteresting" spin-offs as Avaya often make for solid investments for patient investors.

I've always been intrigued by corporate spin-offs. A spin-off occurs when a company "spins off" ownership in a division or business to its existing shareholders. The division becomes an independent, publicly traded entity.

Companies spin off businesses for several reasons. A firm may spin off a business because it no longer fits its long-term corporate strategy. A company that believes it is undervalued may spin off a business with the hope that the spin-off plus the old company will be worth more as parts than as a single company.

Several reasons exist that make spin-offs interesting investments:

• A company that is now out from under a large corporation has the chance to flex its entrepreneurial muscles - something it might not have been able to do as part of a bigger entity.
• A company may have a wider marketplace to sell its products than when it was part of a larger entity.
• Managers of the spin-off understand it is now sink-or-swim time; the larger parent will no longer subsidize the firm. Having your back against the wall is often a great motivator for management.
• Because they lack history, spin-offs are often difficult for Wall Street to evaluate. Thus, the opportunity exists for the spin-off to surprise analysts with better-than-expected earnings. Such positive earnings surprises often translate into a rise in the stock price.

Factors unique to spin-offs often cause investors to sell the shares regardless of their underlying value. For example, following a spin-off, it is not uncommon for the new company to offer an "odd-lot buyback program." Under an odd-lot program, the new company approaches investors holding "odd lots" (less than 100 shares) and offers to buy back the shares. Companies conduct odd-lot programs to help reduce the number of shareholders, thus reducing shareholder-servicing costs. Since many investors own less than 100 shares in a spin-off, the odd-lot program presents a way for these investors to bail out of the stock and pay little or no brokerage commissions.

Another factor that depresses the stock is that many spin-offs pay little or no dividends initially. An investor who likes to receive dividends may have limited interest in a stock that doesn't pay a dividend.

One more reason for selling a spin-off is that the investor bought the former parent company because it liked its primary business. The investor may have little interest in and knowledge about the spin-off's business.

Finally, index investors may be forced to sell a spin-off since the new company is not part of the index the fund manager is replicating.

The upshot is that investors who receive the spin-off shares probably have more reasons to sell the shares than to add to their holdings. When investors dump a stock for reasons unrelated to the company's earning power and appreciation potential, buying opportunities are created.

To be sure, not all spin-offs are worth holding. Some spin-offs have a lot of debt and other long-term obligations dumped on them by the former parent company and may be unattractive. Still, investors should avoid dumping spin-off shares merely for convenience sake, as history has shown that you may be dumping investments with solid potential.

The BUYandHOLD website contains links to third-party websites on the Internet. BUYandHOLD provides these links to these websites only as a convenience to users of the website. Links on the BUYandHOLD website are not endorsements by BUYandHOLD or Freedom Investments, implied or express, of the linked sites or any products, services or links in such sites; and no information in such sites has been endorsed or approved by BUYandHOLD. Linked sites are not under the control of BUYandHOLD or Freedom Investments, and we are not responsible for the contents of any linked site or any link contained in a linked site. No information contained in the BUYandHOLD website or accessed through any linked site, or any link contained in a linked site, constitutes a recommendation by BUYandHOLD or Freedom Investments to buy, sell or hold any security, financial product or instrument. Information accessed through linked sites is not, nor should be construed as, an offer or a solicitation of an offer, to buy or sell securities by BUYandHOLD or Freedom Investments. BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy, and any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.