Creating M&A Opportunities through Corporate Spin-Offs

This article focuses on a motive for undertaking corporate spin-offs that is new to the academic finance literature: the ability to pursue growth through M&A by using stock of the spun-off companies as an acquisition currency and by gaining direct access to capital markets. In summarizing the findings of his study of a large sample of U.S. corporate spinoffs, the author reports that during a five-year period after the spin-off, the typical spun-off firm acquired an average of five companies valued in aggregate at about 45% of the firm's initial market capitalization at the time of the spin-off. The overwhelming majority of the acquired targets were either private companies or subsidiaries of public companies, and about a third of all deals were cross-border. Moreover, after dividing his sample into two groups, the author finds that "frequent" acquirers earned significantly positive abnormal stock returns over one-, two-, and three-year periods after the spin-off, whereas the performance of the other acquirers just matched that of the broad market.