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Tickers in this Article: CAH, OCN, RTP, WLT, HCM, WAC
A spinoff can be an excellent way for a company to generate shareholder value. Currently, there are several interesting spinoffs that are being planned or have just been completed, and investors should monitor these to see if they provide an opportunity to invest.

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Companies pursue spinoffs for many different reasons; a spinoff can allow management to focus on the core business of a company, reversing the effects of a misdirected acquisition binge, but a spinoff can also be a panicked response by management to an activist shareholder.

Spinoff Downside
Investors should realize that just because a spinoff is positive for the company involved, it doesn't necessarily make it a good investment opportunity. A new company can lose the economies of scale it enjoyed as part of a larger company, or it can be stuffed full of debt by a parent company eager to clean up its balance sheet. Lastly, a partial spinoff can leave a large overhang of shares still owned by the parent company which investors expect to flood the market in the future. The perception of this can keep the price of the new company down. (Spinoffs can create great investing opportunities, but there's a time to stick around and a time to jump ship; learn them both in Parents And Spinoffs: When To Buy And When To Sell.)

Pending Spinoffs
Cardinal Health, Inc.
(NYSE:CAH) announced that it would spin off 80% of its clinical and medical products businesses into a new company called CareFusion Corp with an expected ticker symbol CFN on the NYSE. The new company's pro forma revenues in 2009 are estimated at $4 billion. The spin is expected to take place in the summer of 2009, and the new company will have debt of $1.2-1.5 billion. One problem for income-oriented investors is that the new company won't pay dividends.

Ocwen Financial Corporation (NYSE:OCN) is a mortgage loan servicer, and the company announced in December 2008 that it would spin off its business outsourcing segment into a company called Ocwen Solutions. The company hasn't given any further details on the spinoff, but the size of the company raises some issues. Ocwen Financial has a market capitalization of only $685 million and even a partial spinoff would reduce the size of the company considerably. This small size can sometimes impact the ability of institutional investors to purchase the parent or the spinoff.

Energy Spinoffs
Size certainly won't be an issue with Rio Tinto PLC (NYSE:RTP), which is spinning off a subsidiary called Cloud Peak Energy with an expected ticker symbol CLD on the NYSE. Cloud Peak Energy owns several coal mines in the western United States. Rio Tinto filed for the spinoff in August 2008, but has not pursued it further. Coal company stock prices peaked around the same time that Rio filed, and the company may be waiting for equity values to rebound before completing the move. (Learn more in Cashing In On Corporate Restructuring.)

Walter Industries Inc. (NYSE:WLT), another coal company, is also pursuing a spinoff, although the mechanism to accomplish this was slightly more complex than a typical spinoff. Walter spun out its financing subsidiary in February 2009, and that entity merged with an existing publicly traded company called Hanover Capital Mortgage Holdings (AMEX:HCM). Hanover was a mortgage real estate investment trust (REIT), and after the merger the company contained the mortgage servicing and asset management businesses of Walter Industries. The new company is called Walter Investment Management (AMEX:WAC).

Bottom Line
Spinoffs give investors the opportunity to find relatively unknown stocks that might have good upside potential. However, investors need to research carefully before buying due to liquidity, size and other possible issues.

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