Split-Off Ipos: Market Returns and Efficiency

Abstract

This paper investigates split-off initial public offerings (IPOs). Our objective is to investigate the returns prior and subsequent to the offering date of split-off IPOs for high-technology firms in the most recent bull market. Such an investigation is warranted for at least two reasons. First, if both the parent's and the subsidiary's stock price increase significantly prior to the IPO, but the parent's stock price declines but a greater, share-adjusted, basis than the subsidiary's stock price increases following the IPO, arbitrage opportunities may result. Second, in light of the large, one-day returns observed during 1999 for high-technology companies, an observation of mispriced technology split-off IPOs may be possible.

Using a sample of ten recent split-off IPOs, the market price of parent companies carving out a small percentage of a major subsidiary tends to rise one month prior to the filing date and continues to rise until the offering date. Furthermore, this increase is highly related to the success of the IPO on the first trading day subsequent to the IPO. Furthermore, the market appears to anticipate the extent of the success of the IPO correctly. Subsequent to the offering day, the subsidiaries perform well for about three months, while the parent company performs poorly, on average, giving up nearly all of its pre-offering gains. Further investigation of potential arbitrage opportunities indicates that, if both the parent and the subsidiary can be shorted, very large trading profits can be obtained. This result holds for pairs of stocks where the parent's price includes at least 20 percent of the subsidiary's price.