{"id":6554,"date":"2022-01-24T18:48:17","date_gmt":"2022-01-24T13:18:17","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=6554"},"modified":"2022-01-24T19:03:06","modified_gmt":"2022-01-24T13:33:06","slug":"spin-off-investing","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/spin-off-investing\/","title":{"rendered":"Spin-Off Investing: Understanding What, Why, and How With Dayanand Deshpande"},"content":{"rendered":"\n<p><em>This article is authored by Dayanand Deshpande, an MBA (Finance) from SJMSOM, IIT Bombay.&nbsp; Dayanand Deshpande has experience of more than 20 yrs in the <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/\">stock market<\/a> and is considered an authority on Special Situation <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-value-investing\/\">value investing<\/a> in India with a primary focus on spin-off investing.<\/em><\/p>\n\n\n\n<p>I got introduced to this term after reading the Book, \u201c<a href=\"https:\/\/amzn.to\/32it1kS\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">You Can Be a Stock Market Genius<\/a>\u201d written by Joel Greenblatt.<\/p>\n\n\n\n<p>Don\u2019t go by the rather cheesy heading of the book. This book systematically explains what, why, and how of spin-off investing with one case study after another. I cannot recommend this book enough for any serious aspirant.<\/p>\n\n\n\n<p>Before we talk about what is spin-off investing, let me bring home the point about its importance by quoting none other than Charlie Munger.<\/p>\n\n\n\n<pre class=\"wp-block-verse\"><meta charset=\"utf-8\"><a href=\"https:\/\/www.tickertape.in\/blog\/mohnish-pabrai-portfolio\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\">Mohinsh Pabrai<\/a> asked Munger, how to make money in stock markets and Munger replied, concentrate on hannibals** and spin-offs.<\/pre>\n\n\n\n<p>**Self-cannibalism companies eating themselves up via <a href=\"https:\/\/www.tickertape.in\/blog\/buyback-of-shares\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\">buyback<\/a>.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/spin-off-investing\/#What-is-a-spin-off\" title=\"What is a spin-off?\">What is a spin-off?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/spin-off-investing\/#Why-do-companies-do-it\" title=\"Why do companies do it?\">Why do companies do it?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/spin-off-investing\/#Why-does-it-work\" title=\"Why does it work?\">Why does it work?<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-is-a-spin-off\"><\/span><strong>What is a spin-off?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>It is the process of breaking a company into two or more entities. After this process, each subsidiary becomes an independent company. The parent company issues shares to its existing <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> of spun-off subsidiaries in a predetermined ratio.<\/p>\n\n\n\n<p>On the ex-date, the parent company starts trading at price minus the subsidiary and that subsidiary gets listed on bourses at a later date.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why-do-companies-do-it\"><\/span><strong>Why do companies do it?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Corporate restructuring can be done for many reasons, however primarily, companies indulge in this endeavour because it is tax-efficient and helps in value unlocking of the cash-cow businesses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why-does-it-work\"><\/span><strong>Why does it work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Forced selling<\/strong>: A lot of times due to regulatory mandates (size or change of industry), institutions are forced to liquidate their holdings in the new spun-off small company. This sudden and forceful selling creates a big dent and a lot of times stock goes way below its <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-the-intrinsic-value-of-a-stock-and-how-to-calculate-it\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\">intrinsic value<\/a>-creating opportunities.<\/p>\n\n\n\n<p><strong>Focus<\/strong>: Earlier with a conglomerate structure, employees\u2019 attention and bandwidth were choked and spread too thin making them a jack of all. But with spin-offs, entire attention can be devoted to a niche business, which improves its efficiency.<\/p>\n\n\n\n<p><strong>Incentive: <\/strong>A lot of times new spin-off comes with <a href=\"https:\/\/blog.tickertape.in\/sweat-equity-shares-meaning-merits-taxation\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" rel=\"nofollow noopener\" target=\"_blank\">employee stock options<\/a> directly linked with the stock\u2019s performance. The CEO finds a monetary reason to do well.<\/p>\n\n\n\n<p><strong>Pure play multiple:<\/strong> The <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-stock-market\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">stock market<\/a> is known to value conglomerates at a discount and niche businesses at a premium. A great subsidiary business with an amazing cash flow gets a bad valuation because it is clubbed with lousy businesses. Value unlocking happens when a cash cow is freed from the shackles of dragging pigs.<\/p>\n\n\n\n<p><strong>Corporate debt structure<\/strong>: A lot of times, at the time of the spin-off, companies transfer the debt burden onto one entity, freeing the other from the interest burden creating a brand new future cash flow paradigm.<\/p>\n\n\n\n<p>Historically, a lot of wealth has been created by spin-offs. A few that are eye-popping and are visible for all to see have been:<\/p>\n\n\n\n<ol><li><a href=\"https:\/\/www.tickertape.in\/stocks\/reliance-industries-RELI?&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Reliance<\/a> and its subsidiaries&nbsp;<\/li><li><a href=\"https:\/\/www.tickertape.in\/stocks\/bajaj-auto-BAJA?checklist=pro&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Bajaj Auto<\/a> demerging <a href=\"https:\/\/www.tickertape.in\/stocks\/bajaj-finance-BJFN?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Bajaj Finance<\/a> and <a href=\"https:\/\/www.tickertape.in\/stocks\/bajaj-finserv-BJFS?checklist=pro&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Bajaj Finserv<\/a><\/li><li><a href=\"https:\/\/www.tickertape.in\/blog\/facts-about-adani-group\/\">Adani Group<\/a> demerging some multibaggers<\/li><\/ol>\n\n\n\n<p>Some of the demergers that we at Mystic Wealth have personally benefited from include:<\/p>\n\n\n\n<ul><li><a href=\"https:\/\/www.tickertape.in\/stocks\/alembic-pharmaceuticals-ALEM?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Alembic Pharma<\/a><\/li><li><a href=\"https:\/\/www.tickertape.in\/stocks\/kaya-KAYA?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Kaya<\/a> from <a href=\"https:\/\/www.tickertape.in\/stocks\/dabur-india-DABU?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Dabur<\/a><\/li><li>Majesco from <a href=\"https:\/\/www.tickertape.in\/stocks\/mastek-MAST?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Mastek<\/a><\/li><li><a href=\"https:\/\/www.tickertape.in\/stocks\/intellect-design-arena-INEE?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Intellect Design<\/a> from Polaris<\/li><li><a href=\"https:\/\/www.tickertape.in\/stocks\/orient-paper-and-industries-ORPP?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">Orient Paper<\/a><\/li><li>Cement and electric <a href=\"https:\/\/www.tickertape.in\/stocks\/cg-power-and-industrial-solutions-CGPO?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener\">CG Power<\/a><\/li><\/ul>\n\n\n\n<p>Those of you who wish to go in-depth should listen to a 1-hour webinar we did explaining the nuance around spin-off investing along with detailed backtests.<\/p>\n\n\n\n<figure class=\"wp-block-embed aligncenter is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"MWV (MysticWealth value) An Overview     Spin Off Investing.\" width=\"770\" height=\"433\" src=\"https:\/\/www.youtube.com\/embed\/FqsCJsege3U?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<p>Our conclusions after spending a good decade searching and sniffing opportunities in the spin-off world are:<\/p>\n\n\n\n<ul><li>Do your homework, pick your spots, not all demergers are the same<\/li><li>A spin-off in itself, even without stock picking beats the <a href=\"https:\/\/www.tickertape.in\/blog\/stock-market-index\/\">index<\/a> by a big <a href=\"https:\/\/www.tickertape.in\/blog\/margin-requirements\/\">margin<\/a><\/li><li>Promoter buying adds extra is a confirmation to an already strong case<\/li><\/ul>\n\n\n\n<p>We practice this spin-off investing at our smallcase MWV <a href=\"https:\/\/mysticwealth.smallcase.com\/smallcase\/MWNM_0003?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=daydes\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">(Mystic Wealth Value)<\/a>The author can be reached at <a href=\"mailto:info@mysticwealth.in\" target=\"_blank\" rel=\"noreferrer noopener\">info@mysticwealth.in<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Spin-offs are primarily done because they are tax-efficient and help in value unlocking of the cash-cow businesses. Investing in such companies is called spin-off investing.<\/p>\n","protected":false},"author":79,"featured_media":6575,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[9,1749],"tags":[1214],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/01\/TT-24-Jan-BB-scaled.jpg?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6554"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/79"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=6554"}],"version-history":[{"count":14,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6554\/revisions"}],"predecessor-version":[{"id":6579,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6554\/revisions\/6579"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/6575"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=6554"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=6554"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=6554"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}