Why Stub-Trading Might Not Work
-using negative stub trading as an illustration
In this section, we’re interested in the potential problem and difficulty people could encounter in adopting the stub-trading strategy.
Stub-trading, is a strategy trying to detect and utilize the opportunity of mispricing of a parent company and its subsidiary to arbitrage, usually, this kind of opportunity would occur when the parent company uses equity carve out to separate some of its businesses from the company to establish an independent company- the subsidiary. Most of the case, after the equity carve out, the parent company will use a partial IPO to raise capital for its subsidiary, with the parent company still holding major ownership of the subsidiary, and then, the parent company would announce to spin-off the subsidiary, that is, to distribute the remaining shares of the subsidiary to share holders of the parent company.Then, arbitrageurs would decide whether to invest by comparing the proper stub value of the parent company with the stub value implied by the current market price, if there exists a mispricing, then it’s a chance to arbitrage.
The formula used in this paper to calculate the stub value is as following:
P_A=P_(A/B)+X(P_B )
Where P_A means share price of the parent company, P_B means share price of the subsidiary, X means the spin-off ratio, and P_(A/B) means the stub value of parent company. By looking for historical stock price and announcement of the spin-off, we could find out P_A , P_B , and X directly, and thus could calculate the stub value implied by the market. However, since to figure out the proper stub value is relatively difficult as it requires lots of information of the company, we use another approach to det...
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...ng the two examples used in this study were mainly from IT industry, and took place in the era of IT stocks at their peak, from the late 1990s to early 2000s. The examples that have been discussed throughout the study, the spin of 3Com/Palm, and Ubid/Creative are some of the most extreme cases of mispricing that the market has ever observed.
Table 2 in appendix is the list of 18 selected Equity Carve outs from 1995 to 2000, along with the stub values of each of the case. Even though it was the time period that the market has experienced the greatest number of negative stub value spin-off cases, the number of cases with actual stub value accounts only for a third of the sample. It has become incomparably harder to find such cases with negative stub value after this period, thus it will be a very tough job to find spin-off with negative stub values to take arbitrage.
Following the Global Financial Crisis (GFC) of 2009 BlueScope was in its worst ever market position. As of 2011 the price of shares had hit record lows of 38c compared to $12.03 of just three years earlier, showing a 93% reduction in share prices. Huge financial losses were also recorded. In the 2010/2011 financia...
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
...urchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets (McClure, 2004)
The threat of online competitors is also present to every discount broker that has not switched to online trading or chooses to remain with their current business model and not offer online services. These online trading sites have unique trading capabilities that otherwise are not present at Edward Jones. They offer sound advice on stocks and other investments instantly. Each customer has to call their Edward Jones advisor in order to place a trade. This makes sense to Edward Jones because they want to help prevent the rash decisio...
Designed to serve as a massive attack against the idea of investing in newly developed or developing tech companies, the article in itself -through the use of objective facts, detailed descriptions of the market, example situations, and even personal experience based on the author’s own investment in a failed tech-company- provides the reader with enough information to understand the truths behind the market, accomplished in an almost completely objective fashion, and then calls for modern investors to place value in realistic goals and not the “the hyperinflationary world of dotcom valuations.”
The second method we used to analyze the firm’s value was the Comparable Companies Method. We used the historical figures as of 1990 and Goldmans Sach’s Projections. With an average of 22.
To collect relevant data, the annual percentage change in net income per common share diluted, net income/net revenues, the major income statement accounts to net revenues, return on stockholders’ equity, the price/earnings (P/E) ratio, and the book values per share for each year numbers were examined. In order for Sun Microsystems to see a greater return in its bottom line assets, it must consider an alternative approach in operating its organization.
S/F/36. IPO valuation and analysis This work presents classical analysis of the Initial Public Offering (IPO). First of all, the general financial position of the company and the quality of management are scrutinized. This is an important step in the analysis as it allows approaching the valuation step with all necessary adjustments made beforehand. Then the valuation process itself is conducted. The author uses post-IPO cash-flow analysis in order to allow for substantial reduction of debt due to the IPO. CAPM and WACC concepts are utilized to obtain the value of the company. However, this work is not only useful for IPO valuation. The author makes comprehensive analysis of benefits and disadvantages of the IPO. The role of the underwriter and qualities it has to possess are also discussed. Since there may exist the phenomenon of short-run overperformance and long-run underperformance, the analysis of stock market returns is accomplished. Finally, the appropriateness of different stock exchanges for different types of company is discussed. The paper will be useful for students doing comprehensive case-study of the IPO.
By offering the online trading option Schwab was able to lure customers in with an exceptional value proposition as well as a value – delivered system unknown to investors. By placing the decision making and the convenience of trading in the customer’s hands, Schwab made this service exciting and cost effective to customers, thus making many investors satisfied Schwab customers.
"Why We're Expecting a Big Stock Decline in the Next 10 Days | TradeKing." TradeKing Trader Network | Online Stock & Options Trading Community | TradeKing. Web. 28 Nov. 2011. .
We analyzed the market for two weeks to determine when the equity market would turn from a bearish to bullish market. Without a change in the market and a declining bond price, we decided to invest in equities according to our investment strategy, which brought us into the second phase of our portfolio. Therefore, at the beginning of February we bought shares in Sirius, Microsoft, Neon, Washington Mutual, and Nike. As assumed, the equity market continued to plummet decreasing the value of all our stocks except for our Gold Corporation stock.
cleveland.com. Retrieved April 22, 2014, from http://www.cleveland.com/business/index.ssf/2011/01/turning_around_an_american_ico.html. Smith, D. C. (2000). The 'Secondary' Ford at $150 a Share? Ward's Auto World, 36(6), 42.
Week 5 Lecture. (2006). FIN 325 Mergers, Acquisitions, and International Finance. Retrieved from rEsource on July 7th, 2006 from https://ecampus.phoenix.edu/secure/resource/resource.asp
People and Critical Tasks. Peter Norris, although skilled and intelligent, doesn’t have enough experience of the business that he has to manage. Senior managers don’t seem to understand well the future markets. Although Leeson is not qualified to trade, he soon is in control of a team. Leeson doesn’t even use a simple model for pricing the volatility of the market.