Creating M&A Opportunities through Corporate Spin‐Offs

Abstract

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.