Value in spin offs!

Value, in the traditional sense as laid down by Graham focuses on the assets of the company. The idea was, if one did buy a company's shares at 2/3 the net current asset value, one was not only assured a margin of safety but one could also realise a potential price appreciation to book value.

Sir Warren Buffet went on to tweak what was conventionally thought of as value. You could sum up buffet's approach in a few words: "Good business at a fair price"

As it is, these 2 approaches in my opinion are used by so many investors in the states that it may be so hard to obtain really deep value with these 2 approaches. Just to illustrate, in the past, when buffet bought into washinton post, he realised the value was 4 times the price he was buying. These days, it is very hard to find such rare gems as because valu investors will buy stocks which have a 40% margin of safety. Also, ben graham stocks are nearly inexistent in the US now and it sure is a rarity. However, this is not to say that Ben Graham or Warren Buffet type stocks no longer yield sufficient return but rather returns in these methodologies are much less as in the past.

That being said, what i am truly trying to say is, if one wants to search for value, one has to in most cases a complete contrarian and example of such a prominent investor is Joel Greenblatt. Let me tell you, this chap, is a brilliant investor and more or less unconventional in every sense of the word.

His particular focus is spinoffs. Spinoffs are actually divisions within a company that are launched as a separate public listed entity. And management spins off other divisions within the company as they want to unlock the value inherent in the spin off.

Preliminary research on my part shows that spin offs can be rather attractive. For one, shares of spin offs are normally discarded by investors as for some reason, institutions were never interested in the shares of the spinoffs as these spinoffs may be too small for their consideration. As a result, the shares of spin offs are normally depresses creating a 'temporary' bargain price. It is not just the institutions that discards the shares. Investors in parent companies who are sometimes given shares in the spinoff would rather discard it as they do not have the inclination nor the time to do the research necessary to justify these spin offs as value plays. Lastly, in my opinion, spin offs are an area still relatively untouched by value investors. The conventional plays are the buffet types companies and spin offs are seldom buffet type companies and hence in my humble opinion, provides situations which can result in a larger than normal return.

Taking a look at some examples:

1)1 year from the spin off of GNW(genworth) from GE, its price rose 50%

2)1 year from spin off of moneygram, moneygram's share price rose 21%

3)1 year from the spin off of Freescale, it share price rose 20%

4)1 year from the spin off of Hospira, its share price rose 15%

If these examples are not enough to convince you, read on for more posts!!!




Lucas

Arbitrage Opportunity(MCBF)

From http://biz.yahoo.com/pz/070216/113921.html

"The Board of Directors of Monarch Community Bancorp, Inc. (NasdaqCM:MCBF - News) announced today that it has preliminarily approved a going private merger transaction in which holders of less than 1,000 shares of the Company's common stock would receive $13.50 in cash for each share of Company common stock that they held prior to merger. Stockholders owning 1,000 shares or more will continue to hold their shares. The last sales price for a share of Monarch common stock prior to announcement of this transaction was $10.60 on February 15, 2007".

Even though this post is slightly late, this just shows that arbitrage opportunities are lurking around,waiting to be spotted by investors with a sharp eye.As of 6th March 2007, the current price of MCBF is trading at 11.80, so there is still possibility of making a decent profit on this trade.If we bought the stock at 11.80 and received 13.50 in cash once the merger is completed , then

Net Return=13.50-11.80/11.80=14.4%

Not bad for an arbitrage!

Motorola and Icahn

In recent years, Motorola has improved its market share from 14 % to 22 % globally.Despite that, earnings last year fell about 20% from previous years even though sales increased by 22% to 42.9billion.This could be possibly due to its aggressive marking down the prices of its flagship products eg razr.Selling such products would have a detrimental effect on profit margins.Also, another factor is the excessive compensation package CEO Zander received last year. In spite of a poor performance and disappointing earnings, he was paid a whopping 13 million.Clearly,management is not working in the best interests of its shareholders.


Now,recently Icahn has bought a massive stake in the company (about 2 billion in Motorola stock).His sentiment is Motorola stock is undervalued and plans to push through an aggressive share buyback.Given his track record, he will able to find much support among the disgruntled Motorola shareholders and push through his ambitious goals.This probably can be viewed as a catalyst for unlocking shareholder value and give a boost to its sluggish stock price.

Update on Lear

Carl Icahn's offer of $36 a share in cash was accepted by shareholders.Another number of reasons could explain this sudden acceptance despite pleas from other major shareholders (eg Pzena) that the stock was still undervalued.The drastic cutbacks in the US automotive industry due to restructuring and laying off of thousands of workers by Ford and GM has ensured pessimism over automotive -related stocks and depressed such stock prices.Thus shareholders opted for a quick and easy way out, after suffering months of sluggish performance,by accepting Icahn's offer even if Lear was severely undervalued.

However,recent news suggest that GM(the largest automobile manufacturer in the world), is on the verge of turnaround due to its restructuring plans .Lear ,being a supplier of automotive parts,would enjoy a favorable position if and when GM rebounds.Such a situation could explain why Icahn is confident enough to buy out Lear,given that a return to strong profitability is on the horizon.

According to the Schedule 13D/A filed by Carl Icahn, Lear will begin a "go shop" period of 45 days to look for potential bidders who can provide better financial terms .Given that most "go shop" end in failures, Lear being bought out again is not likely.However, Lear will be an interesting stock to follow in the coming months.

Lear Corp and Carl Icahn

Recently, famous shareholder activist Carl Icahn offered a buyout proposal to Lear Corp for $36 a share.Lear Corp, a supplier of automotive parts has been hit hard by the turmoil in the american automotive industry and whose stock price has been battered during the past year.However, the business is still profitable and another major shareholder, Richard Pzena, rebuked Icahn's offer of $36 a share as " low".Using his own valuation metrics, Pzena told other shareholders that the Lear's intrinsic value was roughly about $60 a share.Now , Pzena is well respected investor who follows a " Ben Graham " approach and known for his outstanding track record.However, the offer is also highly unusual for Carl Icahn who is known to buy sizable stakes in companies rather than buying out the company entirely.Clearly, Lear is undervalued and deserves more attention on investors' radar.Also, its shaping to be an interesting battle between these two respected investors and their schools of thought.