What usually happens to a stock price when a company splits into 2 new companies & 2 new stocks?
Posted by admin in Finance Wednesday, 9 March 2011 11:34 2 Comments
The company is made up of 3 companies and one of the companies is being sold. One of the remaining companies will become the main stock with a new name and the stock holders will be given shares of the 3rd company based on the number of the existing shares of the old company. Basically how are stock prices determined?
What happens is that every shareholder in the old company receives a certain number of shares in each of the new companies for every share of the old company. The new shares then begin to trade on the exchange, while the old shares cease to trade.
Typically, this situation (depending on the details, it may be called split-up, spin-off, or carve-out) is a very good news for shareholders. Companies that separate typically do well separately.
Yes, it’s a difficult situation to figure out. The two new stocks basically trade at whatever price the market assigns to them. Usually, it will add up to the price that the single stock was trading at before. Shareholders of the old stock will receive shares in the new stock, too. The really difficult part is if you’re a stockholder, figuring out what your tax basis is on each of these shares.
Strategy hint: What I’ve observed lately is that quite often the new named company is where the value is. They end up leaving all the crummy assets and all the debt in the old named company, and spin off all the cool stuff into the new company. So, I usually sell the old one after the spin-off and buy more of the new one. It’s paid off quite well.