The facts about … spinoffs vs. IPOs

Article Excerpt

Spinoffs take place when a company decides to get rid of a portion of its asset base, possibly because it wants to focus its activities elsewhere. Usually, it’s unable to sell the assets for a price that it feels reflects their true value. Instead, the parent company sets the assets up as a separate company then hands out shares to current shareholders as a special dividend. The parent will only spin off the unwanted subsidiary if it’s fairly confident this will pay off for shareholders in the long term, if not in the short. On the other hand, initial public offerings (also known as IPOs) are inherently riskier than existing stocks—or spinoffs for that matter. That’s because new issues come to market when it’s a good time for a company or its insiders to sell. This may not be, and often isn’t, a good time for you to buy. In addition to the adverse timing, a new issue involves substantial costs that come out…