Spin-offs, Split-offs & Carve-outs: Where Structural Alpha Hides
Ever noticed how structural corporate events can make stocks wobble for no obvious reason?
It’s like everyone was enjoying the party, then someone yells “spin-off!” and the whole crowd runs for the exits. In the chaos, smart investors stick around and quietly grab the leftover pizza. That’s value investing at its core!
That pizza-scavenging mindset is exactly what I do every week in Beating the Tide, hunting market quirks before the herd catches on. If you’re new here and enjoy turning chaos into opportunity, pull up a chair and join us.
These are the moments when forced‐selling flows and when-issued trading whip prices out of whack. Huge funds have to dump or scoop shares on a timetable, and the stock can even start trading on an IOU before the certificates exist. If you know where to lurk, those brief spasms are goldmines.
I learned that lesson by accident. Summer 2006, sweltering Toronto, my apartment AC gasped its last. I fled to the Indigo on Bloor just to stand under the vents. While I was loitering in the finance aisle, a garish yellow spine shouted You Can Be a Stock Market Genius. The title sounded like late-night-TV fluff until I clocked the author: Joel Greenblatt, one of the value-investing heavyweights I’d been reading about. Curiosity won. I cracked the book, settled into a cool corner, and thirty pages later I was hooked. Spin-offs, restructurings and carve-outs, an entire ecosystem of stocks being shoved around by mandate-bound giants and sold for pennies on the dollar.
That chance discovery sent me down the rabbit hole. The logic was beautifully simple: buy from forced sellers, hold until sanity returns. Below, we’ll dig into why index changes, credit downgrades, and corporate carve-outs spark those temporary price quirks—and how to spot and profit from upcoming spin-offs, split-offs, and carve-outs. Think of it as your roadmap to structural arbitrage.
Get comfortable. There’s a lot to unpack, but it’s all about reading the tea leaves of forced flows and cornering value where others can’t be bothered.
Forced Flows: Why Price Gaps Appear
The core idea is simple: when indexes rebalance, credit rating change, or subsidiaries are spun off, big institutional players often have no choice but to buy or sell shares en masse. These forced flows can push a stock far from its true value, at least temporarily.
Case #1. Index Inclusions and Exclusions
When a stock enters or leaves a major index (like the S&P 500), passive index funds and ETFs must adjust. At the same time, smaller funds that follow midcap indexes might have to sell. The net effect often causes a brief pop in price. The reverse happens on removal: those same indexers dump shares, pushing prices down. However, research shows these bumps and dips quickly fade.
On 10 March 2023, S&P Dow Jones Indices announced that Insulet Corp. (PODD) would replace SVB Financial in the S&P 500 effective 15 March. The news hit after the bell, and every index-tracking fund on the planet had two trading days to buy. The mechanical bid was immediate: Insulet jumped roughly 7% in after-hours trading, from about $280 to $300, and kept climbing into the rebalance date.
Once the index reshuffle was complete, however, the flow reversed. Small- and mid-cap funds that could no longer own PODD dumped their shares, and the “forced-buy” tailwind vanished. Over the next six months, the stock bled to roughly $160—down about 45 % in Q3, one of the worst showings in the entire S&P 500. Note that the stock dipped even lower than the $280 base as some fundamental worries continued piling on.
Case #2. Fund Mandates and Portfolio Rules
Most big asset managers stick close to benchmarks. If a stock isn’t in “their” index or their mandate rules it out (by sector, size, or credit rating), they won’t hold it. This means when a firm spins off a small business, many shareholders, especially large institutions, simply aren’t allowed to keep the new shares.
They immediately sell them, often without regard to price. Similarly, if a company’s debt falls from investment-grade to junk (a “fallen angel”), some funds (pension, insurance, and other IG-only mandates) must dump that debt. Often they’ll also trim the equity. These forced sellers can flood the market, creating a temporary discount.
When AT&T spun off WarnerMedia and merged it with Discovery in April 2022, every AT&T shareholder woke up owning the brand-new Warner Bros. Discovery. Trouble is, most of those shareholders were classic telecom-dividend hunters; a leveraged, no-dividend media turnaround was way outside their mandate.
That prediction hit on day one. Trading opened around $26–27 and, as mandate-bound investors dumped, WBD slid to $15 by mid-October.
So we have a textbook case of fund-rule selling creating a temporary discount. Telecom-benchmark funds and dividend-income mandates simply couldn’t (or wouldn’t) hold the spin-off, so they rushed for the exits regardless of price.
Case #3. “When-Issued” Trading
Before a corporate action officially completes, exchanges often allow “when-issued” trading of the upcoming securities. Think of it like a pre-order market. In these thinly traded pre-deals, prices can be lumpy. Sometimes the implied price for the new shares doesn’t match reality.
In practice, if you spot a crazy divergence (say, the implied spin-off price is way above where the parent trades), it can signal a ripe arbitrage. But beware: these markets are usually tiny, so you often can’t execute big trades. Still, even small mispricing can hint at value.
When these events hit, natural buyers and sellers on opposite sides of the trade don’t match up. As Seth Klarman said about spin-offs, they tend to have “a natural constituency of sellers and… not a natural constituency of buyers” . And that imbalance is what creates opportunity.
“When-Issued” Trading: Sneak Peek at Mispricing
Before diving deeper into spin-offs and carve-outs, let’s circle back to that “when-issued” concept because it crops up a lot and can be weird. When a company is about to split off a unit, exchanges often start trading the new shares in a when-issued (WI) market. Essentially, you trade a promise of the new stock before settlement. The parent’s stock and the spin-off’s WI stock move in tandem mathematically, but the market is very thin.
For example, when eBay spun off PayPal in 2015, PayPal trades ran on a when-issued ticker. On day one, PayPal debuted at around $41 per share. But if you could go back a day before trading, the implied “when-issued” price might have been different. Traders can short the parent and buy the when-issued shares of the soon-to-be-spun-off company. In the Kellogg/Kellanova split, one could have created a synthetic position by shorting Kellogg and buying Kellanova in the when-issued market.
The catch? These when-issued markets are illiquid. In many cases, you simply can’t trade enough size. Sometimes only a few hundred shares exchange hands per day, so a big play is impossible. But even observing the when-issued quotes can alert you to mispricing. Suppose the when-issued price is way off relative to the known spin ratio; that’s a flag that someone’s aggressively buying or selling in advance. It might hint that after the dust settles, the market will need to correct back. In short, always check if a big event has a when-issued ticker, as the prices there can give clues or even a chance to enter early (if your broker allows).
Index Inclusions/Exclusions in Practice
Let’s unpack index moves a bit more, since they’re classic forced-flow situations. The research is solid: any initial “index pop” doesn’t last. In one McKinsey study, new S&P 500 members averaged a 5–7% premium just before joining, but “returned to zero within 45 days”. For the first ~20 trading days post-addition, there might still be some residual uptick, but statistically, it vanishes soon. A more recent analysis by McKinsey (2024) confirms: within ~35 trading days (about 7 weeks) after inclusion or exclusion, the stock’s excess return is basically wiped out. The short-lived bump is purely about flows, not new fundamentals.
What to do?
If a company tells you it’s joining a big index, expect a short-term rally as funds rebalance. If you have a target price or reason to doubt long-term upside, you might take gains in the first few days. Conversely, removal from an index can hand you a gift. As passive holders scatter, you could consider accumulating the stock on the dip. Of course, make sure the company’s underlying business hasn’t fundamentally changed. In most index exits, the long-run business value is intact, so buying during the selling stampede is often smart.
Similarly, when debt ratings slip and IG (investment grade) funds sell, it often spills over to the equity. Consider a bond downgrade: hundreds of billions of dollars of bond funds may automatically sell, even if the business is sound. Value investors sometimes target these “fallen angels.” Research on fallen-angel bonds shows a pattern of forced selling ahead of downgrades. While that study is about bonds, the concept is analogous: equity markets often ignore a temporary credit scare, so you can find bargains. If you hear a company’s credit is about to be cut, check if mutual funds or insurers are forced to sell. If so, the stock might get hit too, and bounce back later.
Spin-offs: Spin-Offers Remain Orphans
Now let’s zero in on spin-offs, the superstar special situation for many investors. A spin-off means a parent company distributes shares of a subsidiary to existing shareholders, and the subsidiary becomes a separate public company (usually 100% divested). Investors end up with two stocks: the original (parent) and the new (spin-off). On the surface, nothing changed except liquidity. But in practice, spin-offs often create deep mispricing.
Why?
Remember those forced flows. The new spin-off share typically ends up in the portfolios of the parent’s shareholders automatically, even many who didn’t ask for it. But the new co. is smaller, out-of-index, and not on many fund mandates. So institutional holders often immediately sell.
Greenblatt’s notes highlight this:
Institutional investors are often uninterested in spin-offs, as the companies tend to be small in size… The shareholders often sell them off without regard to price or fundamental value.
In practice, imagine your index fund held ParentCo. Next morning, you wake up owning 1 share of ParentCo and 0.2 shares of NewCo. Oops, your fund can’t touch NewCo by policy, so it dumps it. Multiply that by every fund. That’s forced selling right out of the gate.
No Analysts, No Guidance
Another factor is ignorance. The spun-off company might be a great business, but it’s newly public and likely has zero analyst coverage at first. Few investors fully dig into the S-1 or 10 filing to understand it.
Easy Money, Long Wait
Joel Greenblatt famously said spin-offs are a “hiding place” for bargains that the market neglects. He cites studies showing spin-offs outperform peers by about 10% per year over three years, and even the parents outperform by ~6% (because shedding a draggy division often helps the parent stock too).
Most spin-offs tend to perform better than the overall market and, in some cases, better than their parent companies.
Examples: Take PayPal.
It was once part of eBay and, in 2015, got spun off. On day one, PayPal opened at around $41.63. In the months and years that followed, PayPal, the independent company, thrived and by 2021, its stock was over $300 (seven times its launch price). That’s one for the good guys who bought and held (and sold before the crash 💥).
And consider Allegion (security products) spun out of Ingersoll-Rand in late 2013. It quietly grew into a leader in its niche. Allegion went from the low-$40s at spin to well over $150 as of today. These successes weren’t obvious at the start, as initially, few noticed Allegion or PayPal beyond shareholders of the parents.
Seth Klarman’s Take:
Spin-offs are an interesting place to look because there’s a natural constituency of sellers and there’s not a natural constituency of buyers.
Screening for Spin-offs
Given this, how do you sniff out the next unloved spin-off?
Tip #1. Watch SEC Filings
The spun-off unit must file a Form 10 (for U.S. spin-offs). The Form 10 is a goldmine of info. This filing lists pro forma financials, customer data, etc. If you have the sector knowledge to parse it, you can value the business before it even trades. So keep an eye on new Form 10s (EDGAR lets you search by “Form 10” and keywords like “spin-off”, “dividend”).
Tip #2. Use Spin-off Calendars
Some websites compile upcoming spin-offs. For example, StockSpinOffInvesting.com has an “upcoming spin-offs” calendar listing announced spinoffs, target dates, and resource links. The Zen of Investing and InsideArbitrage also track spin-offs and corporate actions. These are free resources to get alerts on announced deals.
Tip #3. Set Alerts and News Feeds
Google Alerts can help. You might create an alert for terms like “company announces spin-off” or “divestiture announcement”. Many spin-offs are announced 3–6 months before they happen, so early news is key. Likewise, check major business press and 10-Q/K filings for hints of planned divestitures.
Tip #4. Follow the Data Providers
Financial data vendors (Bloomberg, Morningstar) tag corporate actions. Some value screens (e.g. on Bloomberg) can filter for “spin-off from X industry”. Exchange websites sometimes list upcoming distribution dates for special dividends, including spin-offs. If you have a screener, try filtering by keywords “spin-off” or “Carve-out.”
Tip #5. Industry Contacts and Events
Occasionally, corporate conference calls or investor events drop hints (e.g. management saying they’re “reviewing strategic alternatives” for a unit). If you know the space well, you may hear whispers before an announcement.
The key is to get in on the news before the spin-off hits the market. Pre-announcement, mispricing is smaller (no shares yet to sell). After the announcement, the parent’s stock might pop on the news, and the future spin-off’s implied price will float. If you catch it early, you can position yourself for the forced selling later.
Split-offs and Carve-outs: Similar, but Different
Beyond plain spin-offs, companies have other ways to shed assets:
Split-Off
In a split-off, shareholders are offered shares in the subsidiary in exchange for giving up some parent shares. It’s like choosing between ParentCo or NewCo. It’s rarer. But the effect can be similar: those who value one business will swap for it, and others sell. Some funds may have mandates not to hold the new company (if it’s a different industry), so they sell off newly issued shares. The technical arbitrage (if any) resembles spin-offs: calculate the swap ratio and see if one side is mispriced.
Carve-Out (Equity Carve-Out)
Here, the parent sells a minority stake (via IPO) in a subsidiary but keeps the rest. It’s a partial IPO of the unit. Carve-outs can also misprice. A classic example is the 3Com/Palm case: 3Com did a partial IPO of Palm (selling 5% of shares) and planned to spin the rest. Theory says each 3Com share should reflect 1.5 shares of Palm (its later entitlement) plus other assets. After the IPO, Palm shot up 150% on day one, but 3Com fell instead of rising. This implied a negative stub value of 3Com’s remaining assets, which is absurd.
Remarkably, this giant mispricing persisted for months as arbitrage was blocked (shorting Palm was hard). Even after one day, 3Com’s “stub” value was negative $63 (meaning 3Com was priced as if its remaining businesses were worth minus money). It slowly corrected over time, but only because the short squeeze was eventually resolved.
Key lesson: “One Price” can fail. In carve-outs, you have parent stock + new IPO stock representing the same business combined. If arbitrageurs could short/pair perfectly, the prices would lock. But often high borrowing costs or short-sale bans block trades. Many tech carve-outs had large pricing gaps that only ebbed slowly .
Carve-outs and split-offs should be on your radar, similarly to spinoffs. If a well-known company is selling off a piece via IPO or exchange, analyze the math. Check if buying the sum-of-parts is cheaper than buying the parts separately. But be ready for limited arbitrage, as you may not easily short the parent or new unit to lock in a risk-free profit. At minimum, if you have knowledge of the carved-out business, you can buy the cheap piece and wait for the catch-up.
How Knowledge Gives You an Edge
Do you really know what you’re buying?
The above strategies demand real homework. Don’t just jump on a spin-off because it “looks cheap”; invest only where you have an edge. If you were a veteran exec in consumer goods, you have an intuitive feel for Coke or Procter & Gamble. You’re comfortable reading annual reports in that space and spotting winners. So when, say, Kraft Heinz spun off a pet food brand, someone from the pet-care industry might sniff out value before others. Conversely, if you’re a software engineer who built search engines, you may better judge a young ad-tech carve-out than a financial analyst can.
Reading the SEC “Form-10” for spin-offs is key. This isn’t light reading, but if you’ve worked in the industry, that form contains everything about the new business. Retail investors should be honest: Do you understand the business and its numbers? If not, it might be better to stick to what you know.
If you believe you have an edge over the average buyer, you should reap the benefits. Worked in consumer goods? Invest in that sector. If you were a software engineer, bet on emerging tech solutions. In these spin-off and carve-out situations, specialized knowledge can turn structural inefficiency into profit. The market often underprices the orphaned business simply because it’s off most people’s radar, so you can profit if you’re willing to look.
Conclusion
In a nutshell, spin-offs, split-offs, and carve-outs are natural minefields of inefficiency. Wall Street might get distracted by the flashy IPOs and tech darlings, but in the background, a patient investor can make a killing on “boring” spin-offs and carve-outs.
Just remember: have a plan for when the forced flows end. Take profits if the run-up is too quick (as with index inclusion). Or be ready to buy into the puke (as with index exclusion or spin-off overhang). And above all, stay in your circle of competence; it’s no secret that specialists see value where generalists see noise.
Happy hunting for that hidden alpha in corporate restructuring, just make sure your seatbelt is on for the ride.
And if you’d like a steady stream of these off-the-beaten-path setups (plus the full research and real-time trade alerts), come hang out in Beating the Tide. I’m in there every week digging for the next slice before the crowd wanders back in.