It’s been a while, but I am very pleased to release a new ALPP article! Today’s article touches on a question a few people asked me after the annual shareholder meeting: what’s the deal with this spinoff of Global Autonomous Corporation, or GAC.
I’m not going to get into detail on the specific company itself too much. What I really want to describe is what this spinoff means practically for the company and for the investors…How does a spinoff work? Why do one? Is this a good thing? A bad thing? Does it really even matter?
Let’s get to it!
What is a Spinoff?
A spinoff is when a publicly traded company wants to separate a particular business unit, set of companies, etc. from the original company. In a spinoff, the current shareholders of the original company will become the new shareholders of the spinoff company.
What does that mean practically?
Say I own 5% of a company with two divisions, A and B. Say the company wants to spinoff B into its own standalone public company. At the date of the spinoff, I would receive a number of shares in the form of a dividend in the spinoff company (B). These new shares are proportional to my ownership of the original company on a specific date.
In theory then, after all is said and done, I own 5% of company A and company B now. On paper, I am right back where I started (basically) in terms of what I own.
Now, remember that because everything is proportional to what you owned in the original company, the number of total shares issued in this new company is kind of arbitrary. In general, the company will do some sort of analysis on the value of the spinoff company. They will then issue a total number of shares such that you don’t end up with a weird price, like 0.003 per share, or 42,069 per share. This is to make sure you can immediately list on a major exchange while still being easily tradeable (i.e. not have a share price too high).
As a final point, this transaction (almost always) is not a taxable event. Your cost basis from the original company carries over to your shares in the new company. So sorry you tax avoiders out there, you don’t get a step up in basis!
Why do a Spinoff?
You might be wondering, if I end up right back where I was, why do a spinoff at all? The primary reason for doing a spinoff versus a straight sale (i.e. the company just receives cash) is what’s called “unlocking value”.
Unlocking value generally means that your company has several different divisions, product lines, whatever that are different in some way. ALPP is a great example of this. What can happen is the company has a division that is doing amazing things, but it’s a little hard to see because it’s drowned out by ten other business units. At most, you hear some nice highlights in the annual report and shareholder meetings, but that’s it.
When you spinoff a division like this, it is front and center, in your face, and all that anyone sees when investing in that company. Its successes are amplified, but also the converse is true. In the end though, this is what you’re trying to accomplish as a primary goal.
There are a few other reasons which come into play:
- Efficiencies of Scale – sometimes it just doesn’t make sense to have a certain division under your corporate umbrella. It doesn’t scale well with your other businesses, they have nothing in common, etc. Your CEO has to be an expert multiple industries and can’t dedicate all of their attention to one business.
- Future Combinations – many times, spinoff companies are purchased within a few years and/or further combine with other companies. It’s much easier to navigate that transaction as a standalone company versus being part of the original company.
- Ease of Investing – as an investor, it is much more efficient (in general) to invest directly in a particular business unit of a conglomerate versus the whole thing. Say you only want exposure to insurance, so you look at Berkshire Hathaway. But you also don’t want Dairy Queen, railroads, etc. So you look elsewhere.
Remember, it is quite expensive and time consuming to perform a spinoff. So the benefits that management identify generally have to be quite substantive and have a high likelihood of success.
At the end of the day, there is almost always a good reason to do a spinoff when it’s done. They aren’t done just for fun. Very rarely do we see them done for nefarious reasons, think like a PR stunt or Dick Fauld with his famous “SpinCo” of all of Lehman Brothers’ toxic assets. In general, they’re too expensive and time consuming to just do for the hell of it.
What does this mean for ALPP Investors?
From a purely “on paper” sense, this spinoff doesn’t really mean anything to ALPP investors. You’ll still own your shares in ALPP and you’ll also receive the same proportion in GAC. Theoretically the values of ALPP and GAC initially are constant whether they’re combined or not.
With that as baseline…
Everything that happens after that is where value can be generated (or lost) for ALPP (and GAC) shareholders. At the end of the day, you have to assess what ALPP management’s reasons are for spinning off GAC.
For example, if they’re spinning off the company for basically no reason at all, then to be honest all of the effort of performing a spinoff and all of the time, effort, legal fees, etc. are absolutely not worth it. They would be better off just keeping it all as one company like it is today.
With that in mind, we have to assess over the next 12 months or so what ALPP’s reasons are for the spinoff. Do they see it is as unlocking value and/or a much more efficient way to run the two businesses? Who will current management appoint as the CEO, etc. of the new company? What is their plan?
To be honest, there’s way too much unknown right now and I have a hard time giving you a definitive opinion on if this is going to be good, bad, etc. Hell, we don’t even know if it’s going to happen; these things tend to fizzle out.
If we see a good business case for doing this, a well thought out plan for the spinoff, and promising new management, then I think this is something that will be good for ALPP investors.
Conversely, and as a worst-case example (not that I’m saying it will happen), say it’s done just as a PR stunt or for no real discernable reason other than “to do something” then this will inherently be bad for ALPP investors. I don’t think that’s going to be the case, but I have to explain why these can sometimes be bad and what investors need to look out for.
Finally, this could be net neutral. In other words, the costs incurred to perform the spinoff were basically evenly offset by any efficiency gains.
So my take, let’s wait and see. But in general, if you trust management, you should trust them that this is going to be a spinoff for the right reasons.
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