How Joel Greenblatt Evaluates Spin-Offs | Columbia Business School Lecture 1 (2005)

TL;DR

Joel Greenblatt evaluates potential spin-offs by separating a company into its individual businesses and conservatively estimating their combined value. He recommends beginning this analysis early, before a spin-off is formally proposed, while recognizing that announced restructurings may take as long as a year and a half. The Hewlett-Packard example shows how high-return and low-return operations can coexist inside one company. Read on for his practical evaluation process.

Transcript

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Key Insights

• 🧑‍💼 Despite being widely covered, spin-offs can still present unique opportunities for investors.
• 👨‍💼 The analysis of individual businesses is crucial in determining the potential for growth and value creation.

Questions & Answers

Q: How does Joel Greenblatt evaluate a potential spin-off opportunity?

He recommends tearing apart the company into its individual businesses and making a conservative first estimate of their combined value. An investor can begin this work early and refine the analysis as more information becomes available.

Q: Should investors wait until a spin-off is formally announced before analyzing it?

Greenblatt says investors can start before management has formally put a spin-off on the table. He describes this as an early-stage opportunity, although he personally prefers situations that are further along in the process.

Q: Why can breaking up a company create investment opportunities?

A company-wide average can hide major differences among its divisions. Greenblatt notes that an 11% average could include businesses earning 20% alongside others earning 3%, so separating or selling weaker divisions may leave a higher-return company.

Q: What did Greenblatt identify as the valuable part of Hewlett-Packard's printer business?

He says the especially attractive operation was not simply selling printers, but selling printer supplies and ink. Hewlett-Packard also had high market share, a quality name, distribution, and a high return on capital in that business.

Q: Why was Hewlett-Packard discussed as a possible spin-off situation?

After Carly Fiorina left as CEO, speculation arose that Hewlett-Packard might undo its Compaq merger and split its businesses. Greenblatt contrasted the strong printer operation with the lower-return computer business and described the company as facing disarray and uncertainty.

Q: What should an investor do while a potential spin-off remains uncertain?

Greenblatt suggests following new information while developing an initial valuation of the separate businesses. The goal is to estimate conservatively what the pieces would be worth together before the situation becomes fully resolved.

Q: How long can a corporate spin-off or restructuring take?

Greenblatt cites one announced process that management said would take a year and a half. He also notes that Sara Lee expected its cost savings to arrive over five years, which he interpreted as evidence of slow execution and room for improvement.

Q: How could investors profit from the Sears spin-off situation?

The existing analysis describes investors shorting Dean Witter subsidiary shares and buying them back at a lower price after the spin-off. Michael Price's Sears analysis also identified a potentially undervalued retail business and significant real estate opportunities.

Summary & Key Takeaways

• In the case of Sears, the company announced the spin-off of its subsidiary Dean Witter and the sale of 20% of the subsidiary Allstate to the public, creating opportunities for investors to profit from the expected value increase.

• Investors could take advantage of the spin-off by shorting the subsidiary shares of Dean Witter and later buying them back at a lower price after the spin-off was complete.

• Michael Price's analysis of Sears in the Barron's interview indicated a potentially undervalued retail business with significant real estate opportunities, leading to a buying opportunity.