Joel Greenblatt had a lot of success investing in spinoffs and generated outsized returns for his hedge fund Gotham Capital from 1985 to 1994. We wrote the following about him in 2018,
Joel Greenblatt, the founder of the hedge fund Gotham Capital and adjunct professor at Columbia Business School, managed to build a stellar track record from 1985 to 1994 with average returns of 50% per year by focusing on special situations and event-driven strategies. He published You Can Be a Stock Market Genius in 1997 and made the case for tracking spin-offs and especially paying attention to insiders of spin-offs.
In a premium post we wrote in August 2019, we elaborated further that,
Greenblatt’s experience with merger arbitrage was however not pleasant as a number of deals he invested in failed. Over the last year, the tables have turned with merger arbitrage providing better prospects and spinoffs not generating the kind of returns one would expect. Even spinoffs and Reverse Morris Trust transactions with insider buying have seen their stocks drop dramatically. A couple of examples of this include the spinoff of Cars.com (CARS) from the company formerly known as Gannett, Co. (TGNA) and Entercom Communications (ETM) merging with CBS Radio in a tax-free Reverse Morris Trust transaction.
One of the reasons for this lackluster performance of spinoffs is the increased attention spinoffs have received in recent years. The behavioral situation that Greenblatt benefited from was indiscriminate selling of the spinoff by fund managers because it did not fit their investment objectives. This left the spinoff company trading at an attractive valuation and provided opportunities for event driven investors or retail investors that could trade some of these small-cap spinoffs. This advantage appears to have disappeared as more market participants are paying attention to spinoffs, leaving few opportunities for mispricings.