Should smaller public companies think twice about doing spin-offs?
It is an interesting question, when weighed against the recent comments made by Timothy Quast, President of ModernIR, who gave us permission to repeat his comments here:
Small caps should not do spin-offs. This gets to the heart of understanding what “the money” buys today, and how investor relations professionals add value in the C-Suite and Boardroom. The S&P 500 is roughly 87% of market cap. Looking at the Wilshire indices, one can infer that 800 stocks are nearly ALL the market cap now. Since Reg NMS in 2007, the percentage of market cap in the Russell 2000 has been halved. Microcaps have nearly disappeared as contributors to total market cap (1,700 of them are 10bp of total US market cap). The single largest equity asset category is Passive Large Cap Blend – that is, stocks with at least $5 billion of market cap, with value or growth characteristics (which may be assigned to your company whether you have them or not!). And stocks with $100 billion or more of market cap (110 stocks, give or take), call it from Regeneron to Microsoft, are 70% of all market cap.
Money buys size. It is the single largest motivation at Blackrock et. al., the 70% of assets now running in models. Then Value/Growth. Then sector and volatility factors. Spin-offs REDUCE the amount of product you are making available to this market. You want to eliminate obstacles to passive ownership, not create them, because it is what the money is doing, like it or not. It is helpful for investor relations professionals to point out these facts to the C-Suite and Board, so they can make good decisions about shareholder capital. Look, I get why companies do spin-offs. But if our job in investor relations is to help create shareholder value, then we need to arm the decision-makers with data. The good news is we do not have to make the decisions! We just need to provide the info, and recommendations.
Bottom line: instead of a spin-off you might suggest a plan to pursue a big market cap-creating company DEAL, rather than do a spin-off and “split cells,” so to speak.