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D. very different business from the original investment 10. What are the insider's motives? 11. Do insiders want the spinoff? A. Is the compensation of the new management strongly tied to that of the spinoff? B. What percentage of the company's stock is made available to compensate management and employees? C. Are key managers moving to the spinoff? D. Is the parent retaining stock in the spinoff? E. Does management have an incentive to do the spinoff at a low price to set option strike prices low? 12. Is the spinoff positioned to benefit from high leverage (see Host Marriot example on page 70)? 13. On a pro-forma basis, how does the value of the spinoff compare to it industry? A. Is the implied P/E lower than that of the peer group (see Value Line for industry group valuations)? B. Is there an identifiable future event that is not yet factored into the earnings that will drive a higher price and/or multiple, i.e. a new production unit, ship, contract, etc.? 14. Look also at the parent company. 15. Does a partial spinoff reveal that the parent is undervalued? A. Use ratios to compare the implied value of the parent with the value of peers. (The Sears partial spinoff of Allstate and Dean Witter revealed that Sears was trading at 6% of sales vs. 56% at J.C. Penny.) 16. Look at rights offerings. Posted by Gregory Speicher at 9:41 AM Labels: Checklists, Investment Process, Spinoffs