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Answer:
Dear
Sally,
Yes...spin-offs
seem to go in cycles and often (but certainly not
always) they wind up being successful.
The
most recent spin-off grabbing attention is that of
Viacom. It has announced that it will split its cable
business and its CBS division into two separate stocks.
Just
prior to the Viacom news, Ford Motor Company said
it was planning to spin off its rental car unit --
Hertz -- from its manufacturing division.
The
positives
We
cannot tell you that the moves made by Viacom and
Ford will pay off -- the results are yet unknown.
However, we can tell you that -- according to Thompson
Financial, which tracks this sort of data -- the 10
largest spin-offs since 2000 have reported, on average,
stock market gains of 41%.
During
that same time period, the Standard & Poor's 500 Stock
Index had an average loss of 2%.
Some
of the successes
Among
the names of recent and successful spin-offs that
you may recognize are:
| Spin-off
Name |
Date
Of Spin-off |
| AT&T
Wireless |
April
2000 |
| KPMG
Consulting |
February
2001 |
| Kraft
Foods |
June
2001 |
| Alcon |
March
2002 |
| Travelers |
March
2002 |
| CIT
Group |
July
2002 |
| Assurant |
February
2004 |
Of
this group, the most successful has been the medical
device company Alcon. Its shares have more than tripled
in price since being spun off from Nestle.
Coming
in second place -- the CIT Group, a financial company.
Since it was separated from Tyco, its shares have
almost doubled in price.
In
all of these cases, the spin-offs were involved in
a business quite separate or different from the activity
of the parent company, with a possible exception.
You could say that the Hertz Rental Car unit was somewhat
connected to Ford Motor Company in that they both
were in the "car" business.
There's
current speculation on Wall Street that there may
be another "car" spin-off. Kirk Kerkorian, the well-known
and highly influential investor has recently increased
his position in General Motors. Some say it may be
in anticipation of a spin-off of General Motor's financial
arm, GMAC. Taking it one step further, it might (note
we say "might") be an effort on Kerkorian's part to
increase pressure on GM to actually take such a step.
No
knee-jerk reactions please
A
spin-off does not necessarily a winner make.
You
shouldn't rush out and buy any and every spin-off
just because they're spin-offs. If you're tempted
to do so, keep in mind the Blockbuster story. It was
spun off from Viacom in 1999 and ever since has been
a pretty lackluster, not a blockbuster, stock!
You
need to study the basic factors involved before adding
shares of a spin-off to your portfolio. These include:
(1)
The spin-off's business -- is it a leader within its
industry?
(2)
Who the management team is
(3)
How financially solid (or weak) the division is
(4)
How much debt it is carrying
(5)
What is its revenue stream.
In
addition, try to ascertain how well it will be run
once it is spun off.
In
other words, follow all the stock selection guidelines
we've talked about previously in this column.
Good
luck!
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.
Any investment decisions you make will be based solely
on your evaluation of your financial circumstances,
investment objectives, risk tolerance, and liquidity
needs. The securities mentioned above are being used
for illustrative purposes only and should not be regarded
as an offer to sell or as a solicitation of an offer
to buy and past performance is no guarantee of future
results.
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