Word: parently
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Milton won his prominence in a bareknuckle corporate brawl. Only a few weeks after assuming the presidency in August 1999, he was hit with a hostile takeover bid backed by AMR, parent of American Airlines. Milton won a court verdict reaffirming a law that said no single shareholder could own more than 10% of Air Canada, effectively scuttling the bid. Then, with backing from United Airlines and Lufthansa, Air Canada swallowed its competitor for a fire-sale $61 million. Milton summed up his business philosophy: "I don't mess around with other people, and I don't like people messing...
Usually, though, spin-offs are about dumping a distracting but often healthy operation to focus on a core business. In such cases, not only does the spin-off stock tend to beat its peers, but the parent stock does too. Why? In the case of the parent, investors value that sharpened focus. In the case of the spin-off, management doesn't have to compete for the parent company's attention and capital. Set free, managers can explore new products and markets...
...been spun off than it did when it was part of a larger entity. They also found that spin-off companies have a better than average chance of being taken over. By their calculations, spin-offs outperform a peer group by 30 percentage points over three years, parent companies by 19 points...
...results are similar in cases in which a subsidiary is only partly divested. Known as equity carve-outs, these divestitures tend to be IPOs of less than 20% of a business. The parent retains the bulk of the stock--and control--but often later gives that stake to shareholders as a tax-free dividend. Early this year 3Com sold 17% of its white-hot Palm unit in an IPO, then gave the rest to shareholders in July. The average carve-out does well. Palm has doubled since July, although it remains below March's mania levels. But parent companies tend...
...spin-offs soar. Look out for junky companies created to separate legal liability or off-load debt from the parent. And some carve-outs simply don't make good stand-alone companies, like Barnesandnoble.com and other dotcoms that are really just brand extensions designed to cash in on the Internet bubble. Such IPOs may get a lot of attention, but that's not where you find the big money...