Imagine that you own shares in a company, which is going to demerge one of its business. Once a demerger/Spinoff occurs, investors have an important decision to make: Whether to sell or hold shares of the parent company or to sell or hold shares in the new company? We have been getting lot of questions on the same topic from several of our clients; hence, we thought of writing this article.
Demerger or Spin-off
When a company does a demerger, a particular segment of that company’s business becomes a new company. A demerger can be seen as the opposite of a merger. In a demerger, a company distributes its entire ownership interest in a business unit as a stock dividend to existing shareholders. It is tax free and usually helps both the parent company and new company (spinoffs) achieve better results by operating as separate entities.
Stock price performances
Studies have found that shares of both the parent and the newly listed company will outperform the market with the edge going to the Spinoffs. What could be the reason behind this outperformance?