Creating M&A Opportunities through Corporate Spin-Offs
Journal of Applied Corporate Finance, Volume 27 Number 3, 2015
7 Pages Posted: 25 Sep 2015 Last revised: 3 Sep 2016
Date Written: September 24, 2015
This paper identifies a new motive for undertaking corporate spin-offs: a desire to pursue growth through M&A by using stocks of the spun-off firm as an acquisition currency. We find that spun-off firms make frequent acquisitions beginning in the year of the spin-off. Over a five-year horizon, a spun-off firm acquires, on average, five companies valued at about 45% of its initial market capitalization. In comparison, an average firm in our sample invests 36% of its initial capitalization in property, plant, and equipment, and 22% in research and development. The overwhelming majority of the acquired targets are either private companies (55%) or unlisted subsidiaries of public companies (33%). To finance growth, spun-off firms raise more capital through seasoned equity offerings than through new debt issuance, violating pecking order choice of financing between equity and debt. Perhaps most importantly, spun-off firms that are frequent acquirers enjoy highly significant abnormal returns over 12, 24, and 36-month period following the spin-off, whereas infrequent acquirers perform as expected.
Keywords: Mergers and acquisitions, Spin-offs, Corporate investment, Corporate policies, Abnormal return
JEL Classification: G34, G31
Suggested Citation: Suggested Citation