Breakup Not Necessarily A Sob Story For Investors

Talk about “breakup” and you conjure depressing images of companies clawed to pieces by greedy corporate raiders in the 1980s - a frightening situation for small investors, who can only stand by while the crocodile’s decide their fate.

But breakups like the one proposed by AT&T Corp. can bring investors wonderful returns. Some pros believe such “spinoffs” offer small investors an unusual opportunity to compete with the big boys.

“There are any number of academic studies that show substantial outperformance of both the parents and the spinoffs,” says Forbes Tuttle, editor of the Spin-Off Report, a New York newsletter.

On a spin-off bet, he says, the small investor doesn’t need the kind of early warning system that’s essential to effectively compete on a takeover play. And you don’t need special access to newly issued shares the way you do to really exploit an initial public offering.

Two weeks ago, AT&T announced a proposal to spin off its communications hardware manufacturing operations into one company and its computer division into another. AT&T shares jumped $6.125, or 10.6 percent that day, a tidy return.

Of course, to get that profit you had to own the shares before the announcement was made. Now that the news is out, is it too late to bet on AT&T’s breakup?

You can’t know for sure. After all, you won’t be able to buy shares in the two spinoffs until the breakup in 1996 or 1997. But there is evidence that investors can profit from spin-offs even if they don’t get in until after an announcement is made.

A 1993 study done by two Penn State professors and a Lehman Brothers analyst looked at 161 tax-free spin-offs completed between 1965 and 1990. They found that spin-offs offer investors returns that dramatically beat the market.

The average return from a spin-off was nearly 20 percent the first year after the spin-off, 52 percent in the first two years and 76 percent over the first three years.