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Registration Statements: Form 10-12B: Basic Guide

By : | February, 11 2010
Moneywatch   Form 10/12B must be filed whenever public companies register new stock as a result of a spinoff. Think of it as one-stop shopping for everything you need to know when companies part company. Academic research has found that spinoffs can provide investors with excellent opportunities: Unwilling shareholders of the parent company often dump the new shares, driving the price to cheap levels. Managers of the newly independent — and nimble — entity, meanwhile, are focused and motivated. But as an investor, how can you get information about a company that didn’t even exist last year? Check out Form 10/12B, which must be filed whenever public companies register new stock as a result of a spinoff. The form is one-stop shopping for everything you need to know when companies part company. The Rules
  • The SEC requires companies to file a registration statement, Form 10/12B, when they plan to issue new stock as part of a spinoff. (Form 10/12G, is for general stock registrations outside of a spinoff, while IPOs use another type of form, the S-1.)
  • The 10/12B filing itself is less like a form than a list of exhibits, which can be divided into three major sections:
    • A letter to shareholders from the parent company, stating the history of the company and the reason for the spinoff.
    • An information statement detailing what the new company will look like.
    • Financial documents, including pro forma statements that show how the new company would have performed in the past had it been a separate entity.
What to Look For  Investors should focus on the first and second sections, says Rick Martin, head of technical accounting at Pluris Valuation Advisors, a Manhattan firm that specializes in valuing illiquid assets. “Here you can see what the company is planning to do, and why it might be advantageous,” he says. These are scenarios to watch for: Growth is good. Some spinoffs are about freeing up a fast-growing division so it can make its own decisions about allocating capital. If management of the spinoff says it plans to plow cash into more growth opportunities, that’s a sign that the parent company was hobbling the division, and it signals expansion. Look for leverage. “Parent companies often use spinoffs to unload debt,” says Martin. “But that can signal a good investment, because leverage amplifies the impact of sales growth and margin improvement.” In other words, rapidly improving sales may allow the spinoff to pay down its inherited debt faster, improving the outlook for the company and the stock price. Of course, debt also magnifies the risk if the firm runs into trouble. Management perks can comfort investors. Check the prospectus for stock options and restricted stock for executives of the spinoff. Says Martin, “Incentives don’t mean executives will be successful in running the company wisely, but they can help align their interest with shareholders’.” Don’t dismiss an ugly duckling. Spinoffs often happen when two companies who merged in the past later decide they aren’t the right match. Maybe the business synergies didn’t pan out (as was the case with Time Warner-AOL) or the division is considered too small to be worth the larger firm’s attention. “A small spinoff may appear unattractive,” says Martin, “but its size may only appear small relative to the larger company. It could be a very promising standalone company that is under-priced.”

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