Study finds parallels on demergers
An investigation into demergers by Macquarie Private Wealth follows engineering company UGL last week indicating it may split its property and engineering divisions. That caused UGL's share price to jump 12 per cent in a day.
Macquarie analysts used the UGL announcement - and a future split of News Corporation - to measure the performance of stocks following demergers.
They revisited the bank's historical data, which includes 29 spinoffs since 1995, and found the performance of parent and child companies tends to vary "quite consistently" after a demerger.
The report measured the cumulative excess returns six months before and 12 months after the demerger date.
It found the child stock typically underperformed the market for the first few weeks following a spin-off, and that this continued for at least six months.
"The child entity can underperform by up to 9 per cent in the six months following a demerger," the Macquarie Private Wealth report said. "It is not until 12 months after the split that the child entity typically outperforms."
The performance of parent entities is typically flat leading into a demerger then better after the split.
Frequently Asked Questions about this Article…
Macquarie Private Wealth found that stock performance after demergers varies considerably. Using 29 spinoffs since 1995, the report showed child (spun-off) and parent companies often follow different paths: children typically underperform the market for the first few weeks and for at least six months, while parent stocks tend to be flat into the demerger and improve after the split.
The report measured cumulative excess returns six months before and 12 months after the demerger date to track short- and medium-term stock performance following a split.
Yes — the study found child stocks typically underperform the market in the initial weeks after a spin-off and can continue to lag for at least six months. In the six months following a demerger the child entity can underperform by up to 9%.
According to the report, child entities typically begin to outperform only around 12 months after the split, rather than immediately after the demerger.
Parent company shares are generally flat in the period leading up to a demerger and then tend to perform better after the split, based on the historical data reviewed in the Macquarie report.
The analysis referenced engineering company UGL — whose shares jumped about 12% in a day after it indicated a possible split of property and engineering divisions — and a proposed future split of News Corporation as examples to measure demerger effects.
The report revisited Macquarie's historical data covering 29 spinoffs dating back to 1995.
Everyday investors should be aware that demergers often create short-term variability: spun-off child stocks commonly underperform initially (sometimes by up to 9% over six months) and may only outperform after about 12 months, while parent stocks can improve after the split. These patterns are based on historical data, so investors should factor in potential short-term volatility and differing trajectories for parent and child companies.
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