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Why Investors Relish Corporate Spin-offs

Corporate spin-offs, though not as sexy as mergers or initial public offerings (IPOs), often reward stockholders of both the parent and offspring companies - if they're patient.

In fact, the stocks of 60% of spin-off companies end up in positive territory one year after a split, according to London-based The Spin-off Report.

"There's value in the [spin-off] company prior to the event that generally gets missed," said Ryan Mendy, Chief Operating Officer of The Spin-off Report.

After some slow years during the market downturn of 2008-2009, corporate spin-off activity has revived.

Globally there have been 46 spin-offs of companies valued at over $250 million this year, according to The Spin-off Report. That compares with 36 last year and just 27 in 2009.

A few of the recently announced major spin-offs include The McGraw Hill Companies Inc. (NYSE: MGH), Tyco International Ltd. (NYSE: TYC), and Kraft Foods Inc. (NYSE: KFT).

Tyco is actually splitting into three pieces, which analysts estimate could boost shareholder value by 60%.

"The idea is to create smaller and more focused businesses," J. Randall Woolridge, finance professor atPenn State University, told USA Today.

Both spin-offs and their parents tend to outperform the market. According to a study done by The Spin-off Report of more than 500 corporate spin-offs between 2000 and 2010, the stocks of 58% of the parents and 60% of the spin-offs were up after one year.

Better yet, they were up significantly. The parent companies climbed more than 17% on average and the spin-offs themselves soared more than 24%.



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