When Bristol-Myers Squibb (NYSE:BMY) did the stock spin-off of its Mead Johnson (NYSE:MJN) nutritional unit I wasn’t too excited about it, because I figured that it didn’t fit the successful spin-off stock model that tends to create a value situation. But I overlooked one way that it did create value, and that turned out to be an important one.
Generally, the simple stock spin-off in which shares of the new company are distributed to current shareholders of the parent company is the easiest kind for me to understand. People get shares whether they want them or not. For various reasons many of them don’t want or can’t keep the shares they receive, so they sell them soon after the spin-off which drives the price down below where it “ought” be by common measures of value.
The IPO route taken by Bristol-Myers Squibb did not hand shares to people who were very likely not to want to keep them. It sold them to willing buyers. So, I asked myself where is the value creation force in that situation. No one had shares they wanted to unload right away and if you look at MJN’s chart you will see that they didn’t. But something else was at work.
BMY kept 83% of the total shares of the company. What this did was limit the public float.
Public float describes the number of shares that you or I or anyone else can go buy on a stock exchange. The public float does not include shares owned by officers, directors, or others with a very large stake in the company. In other words, people who can’t or are very unlikely to sell them.
Thus, for large scale investors, no matter how good MJN might look to them, setting up large positions was very difficult or impossible. They couldn’t get in without distorting the market .
Going back to the reasons I like spin-off stocks, notice the one about how the “big guys” often aren’t interested or can’t go there. When I wrote that I was thinking of a case in which the spin-off company was simply too small for most big investors.
What I hadn’t considered was how this same thing might be accomplished by holding back stock and creating a small public float. Nor had it occurred to me that when they completed the spin-off by selling the rest of the shares, this would be the selling that pushed the price down as the chart seems to show the October, November, December time span.
So, there it is: lesson learned (I think). Will I be smart enough to see signs that an IPO spin-off has this potential? To work both the potential for big price movements due to the small float and not get caught flat-footed when the rest of the shares are dumped onto the market? Frankly, I don’t know. I hope I’ll be smarter about it, but of course these things never look exactly alike. I do know that I will not reject an IPO spin-off out of hand. Beyond that, we’ll see.