News & Press
Western Digital Corp. appears closer to spinning off its flash business after disclosing new details about financing and its strategic review.
Earlier this week, the firm detailed a $900 million sale of convertible preferred stock to investors including Apollo Global Management Inc. and Elliott Investment Management. The disclosure provides investors greater insight into a potential transaction after Bloomberg reported that the spun-off unit may merge with Kioxia Holdings Corp. to create a publicly traded company in the US.
Selling preferred shares enabled the company to secure an influx of cash without an immediate shakeup to its financial profile, said Jim Osman, founder of The Edge Consulting Group. “Raising capital through the preferred stock route would not only provide liquidity but also ensure that there is no immediate dilution to ownership, nor is the company highly levered by raising capital in the form of additional debt,” he said in an interview. “However, deal talks are still in the early stage, and they must overcome regulatory hurdles to complete the merger.”
Johnson & Johnson’s decision to hold a traditional IPO for its consumer health unit raised some eyebrows on Wall Street due to the moribund new issues market, but analysts say it makes sense when viewed as part of a two-step process. Shares of J&J are down 2.5% since the company filed for an initial public offering of Kenvue Inc. on Jan. 4 after the market closed. The announcement was welcome news for New York’s IPO market, which is coming off its lightest year in decades partly due to a preference for tax-free separations by companies navigating the impact of macroeconomic headwinds.
An IPO will enable J&J to get the highest possible price while it also plans a future tax-free distribution of its remaining shares, analysts at The Edge Consulting Group wrote in a note to clients.
Traders have punished traditional IPOs during the past year’s stock-market selloff, forcing most candidates to wait for lower volatility and a more certain interest-rate outlook. Just five IPOs raised more than $500 million apiece in the past 12 months, and four of those stocks trade below their offering prices. Spinoffs, on the other hand, have outperformed. The Bloomberg US Spin-Off Index is down 7.8% over the past year compared with a 17% decline in the S&P 500.
Healthcare spinoffs are everywhere you look these days. Just in the first week of January, Johnson & Johnson’s consumer unit Kenvue officially filed for an initial public offering, GE’s newly spun-off healthcare unit started trading and Baxter announced plans to spin off its kidney care unit. Swiss giant Novartis, meanwhile, is working on spinning off its generic Sandoz business.
Generally speaking, spinoffs are usually an attractive way to drive shareholder return. First of all, they are tax-efficient. But more important, they allow the parent company to reduce complexity where size in and of itself confers no strategic advantage. Meanwhile, the newly established company gains autonomy to make better decisions. That is the idea with newly listed GE HealthCare Technologies, whose management is arguing that a more nimble company will make faster and better decisions.
But it is hard to get excited about the company’s valuation. The newly listed shares closed at $58.95 on Friday, at the higher end of Morgan Stanley analysts’ valuation range of $52-$59. The Edge Group, a research firm focused on special situations, has a target of $54.52 for the stock, reflecting an enterprise value of 12.7 times forecast 2024 earnings before interest and tax—a discount to peer Siemens Healthineers.
Slow going in the IPO market is fostering an unusually packed calendar of tax-free spinoffs as companies seek to boost value by floating parts of their business. Fortune Brands Home & Security Inc. climbed 1.5% on Tuesday after its board of directors approved the spinoff of its cabinets business. It’s just the latest in a busy stretch for separations that give stockholders shares in a new publicly traded entity without triggering a tax event.
Parent companies often choose segments for spinoffs because they feel they’re being underappreciated by the market. The transactions are a useful tool to unlock value as market conditions hinder alternatives like initial public offerings. Spinoffs currently on the calendar are near an all-time high with close to 40 transactions in progress, according to Jonathan Morgan, lead deals analyst at The Edge Consulting Group.
“Companies are looking to create value in some form or fashion in this market,” he said at a special situations conference last week. “They’re not doing it through the traditional way of an IPO. Companies in this market aren’t going to be willing to sell any of their segments at this time. ‘SPAC’ is such a dirty word that it’s not happening anymore. The fourth option, whether they like it or not, is to announce a spinoff.”
Presentations were made yesterday (November 17, 2022) at The Edge’s 6th annual charitable conference by keynote speakers Joel Greenblatt (Gotham Capital), Rupal Bhansali (Ariel Investments), David Marcus (Evermore Global), Gary Klein (ShadowBox), George Muzea (Muzea Advisors), Paul Johnson (Columbia University) and Jonathan P. Morgan (The Edge), all benefiting The Alzheimer’s Association. Together with the donations of attendees of the online conference, The Edge raised over $15,000 for the charity.
Bloomberg provided coverage of the event, and The Edge can provide the recording of the conference and the presentation materials on request at firstname.lastname@example.org.
Story by Laura Forman (WSJ): Tech-weary investors might just find salvation in an octogenarian billionaire. No, not value investor Warren Buffett, who has in any case aged out of that cohort. Barry Diller has produced similarly impressive returns with a starkly different strategy—until recently, that is. “We have no competition with this business model,” Mr. Diller says. “Maybe because it’s crazy and maybe because it’s savvy.”
“History shows spinning off companies can be beneficial. In a 22-year study beginning January 2000, special situations research boutique The Edge Consulting Group showed spinoffs as an asset class generated three to four times the S&P 500’s returns on average over the first 12 months, concluding “the sum of the parts is greater than the whole.”
The decision by Intel Corp. to push ahead with the initial public offering of its self-driving technology unit at a much lower valuation than originally envisaged may presage more trouble ahead for the market, analysts said. Intel was the worst performer in the Philadelphia Stock Exchange Semiconductor Index and the second biggest weight on the S&P 500 Index Tuesday, falling 2.1% after the company set terms for the highly anticipated IPO of Mobileye Global Inc.
“Investors should approach with caution and extra due diligence this and any new issues being sold to them in this environment,” said Jim Osman, founder of research firm The Edge Consulting Group. “There is a desperation trade about it.”
The Greater Fool Theory Just Played Out In The Stock Market. Here’s How To Capitalize On The Opportunity.
Legendary military tactician Sun Tzu changed the way that war and warfare are conducted today. Sun Tzu was a man about whom nothing is known with certainty, but he is best known for his work The Art of War, which serves as a manual for winning wars and conflicts. “Therefore, those who win every battle are not really skilled—those who render others’ armies useless without fighting are the best of all,” Sun Tzu wrote in The Art of War. This “fighting without fighting” is much more of a mental contest than an actual physical fight.
The stock market is always difficult to navigate. Investing is a lot like getting ready for battle. Both entail evaluating one’s positions, strategizing, conducting in-depth research, managing risks, creating scenarios, and more. Sometimes it will lead you to believe it’s easy. According to the Greater Fool Theory, one can profit from a market bubble by purchasing overpriced assets and later selling them for a profit because there will always be buyers prepared to pay a greater price. Speculators subscribing to the Greater Fool Theory could be left holding the bag after a correction. The number of new investors coming to the market in the last two years who claimed it was easy and are now back at their day jobs received this hard lesson.
Real Talk: The Charles Mizrahi Show — This Special Situation Is Hiding in Plain Sight (Podcast Interview with Jim Osman)
Charles Mizrahi: “When I want to know more about special situations, I turn to this guy. He’s been at it for more than three decades… Jim Osman is the founder of The Edge research group. Global asset managers and hedge funds pay him a fortune to gain his insight. The reason is simple: He’s that good. And one special situation that he’s focusing on now is hiding in plain sight. It involves three companies that were founded more than 100 years ago. And very shortly, they’ll be creating huge shareholder value.”
An Introduction to Jim Osman (00:00:00)
What’s a Spinoff and Why Are They So Lucrative? (00:04:43)
The McDonald’s Spinoff of Chipotle (00:14:45)
When the Market Comes Down, It’s De-Risking (00:24:33)
Avoiding the Inclination to Sell Your Spinoff (00:40:56)
One of the worst downturns the US has experienced in recent history was the Great Recession from December 2007 to June 2009. The economic crisis was caused by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages. The S&P 500 briefly fell to the apocalyptic value of 666 on March 6, 2009, and reached its closing low of 676 three days later. It was a mess. I remember watching stocks in freefall. Company share prices were getting cheaper daily and investors were starting to panic. The market took big casualties during the period, including investment banks like Lehman Brothers and Bear Stearns. I remember thinking it was bad, but also thought this couldn’t last forever, and I got to work preparing my watch list of stocks I wanted to buy. It was probably the first time I had really methodically gone through companies very carefully knowing that an opportunity was coming, and I wasn’t going to miss it. This is an exercise I continue to practice today.
Market peaks and troughs come in many different disguises. A look at history will tell you this. I get a little tired of commentators comparing what happened “before” to what is happening now. Nothing is ever the same in history and the world changes daily. New investors come along with different habits and market cycles are forever morphing into different forms. What never seems to change are investors’ emotions. This is the one thing you can rely on to drive markets (usually incorrectly) most of the time, something which few commentators ever recognize or speak about. They are usually caught up in it themselves. They are purveyors of bad news. Investors chase quick money as prices rise and flee in fear when they decline on future news flow. Nothing can be further to what you need to be successful. Remember, risk decreases as the market falls as companies become cheaper, it doesn’t increase. It just may seem like the opposite.