[Beginner's Guide to Stock Investing] The 'Spin-off' That Was Supposed to Be Good News... Why Is the Stock Price Falling?

Editor's Note[Beginner Investor's Guide] is a smart investment guide for 'Beginner Investors (Ju-rini, a combination of stock + child)'. We will kindly and easily explain stock stories that are unfamiliar to beginner investors.

[Asia Economy Reporter Kwon Jae-hee] Recently, OCI, the only domestic polysilicon manufacturer, announced that it will 'spin off' its core businesses such as solar energy and chemical business to transition into a holding company structure.

More than 10 companies have decided on spin-offs just this year.

What exactly is a spin-off that so many companies are making this decision?

Also, let's find out how spin-offs affect stock prices.

What is a spin-off?

Take a close look at this illustration. The corporation Matdongsan has pizza and chicken business divisions.

There are four shareholders.

Matdongsan decided to separate the chicken business and create a new company.

This new company is called a spin-off newly established corporation.

The name of the new corporation is Matisshu.

All assets and liabilities related to Matdongsan's chicken business are transferred to Matisshu.

The existing company, which remains with only the pizza business after separating the chicken business, is called the spin-off surviving corporation.

The company name remains Matdongsan.

The new company Matisshu issues shares and distributes them to the existing four shareholders.

After the spin-off, the four shareholders become shareholders of both 'Matdongsan' and 'Matisshu' and retain their control over both companies.

The spin-off method where the shareholding ratio before and after the spin-off remains the same is called a 'personnel spin-off' (in Korean, 인적 분할).

Simply put, a personnel spin-off means that existing company shareholders become shareholders of both companies after the spin-off.

Why do companies do personnel spin-offs?

There are mainly two reasons why companies do personnel spin-offs.

First, transition to a holding company structure.

OCI's personnel spin-off falls under this case.

OCI announced that it will spin off its core business divisions such as Basic Chemicals and Carbon Chemicals into a newly established company and convert the existing OCI into a holding company.

Second, when a company has complex business divisions and subsidiaries.

Isu Chemical's personnel spin-off is a good example.

Isu Chemical resolved to spin off into the petrochemical business division (Isu Chemical) and the specialty chemical business division (tentatively named 'Isu Specialty Chemical').

The plan is to separate the previously mixed business divisions to achieve management efficiency and nurture new businesses as strategic businesses.

How does a personnel spin-off affect my stocks?

Generally, corporate spin-offs are often perceived as positive news.

One advantage of spin-offs is that the corporate governance becomes more transparent.

Also, businesses that were mixed in one company gain specialization through spin-offs, which can positively affect stock prices.

In particular, personnel spin-offs are a positive factor for stock prices because unlike a physical spin-off where the existing company owns all shares of the new company, the new company's shares are distributed proportionally to shareholders, so shareholder value is not diluted.

However, there is something unusual.

OCI, Daehan Steel, and Hyundai Department Store Group, which announced personnel spin-offs this year, all saw their stock prices decline after the spin-off announcement.

OCI, which decided on the spin-off on the 23rd of last month, saw its stock price rise intraday by up to 6.25% on the 24th, the day after the announcement, but closed down 5.96% that day.

Since then, the stock price has been on a downward trend.

Daehan Steel's stock price fell for two consecutive trading days after announcing the personnel spin-off. Hyundai Department Store Group's stock price also declined after the spin-off announcement in September, hitting the lowest price since the 2008 global financial crisis at 52,400 KRW on October 12, before recovering to 59,600 KRW as of the most recent closing on the 2nd.

Isu Chemical also experienced an intraday drop of up to 12% the day after the spin-off announcement.

Personnel spin-offs are supposed to be good news... but why are stock prices falling?

There can be several reasons why stock prices fall after a personnel spin-off.

First, if the purpose of the spin-off is to allow major shareholders to monopolize profits from core business divisions or strengthen control, stock prices tend to fall.

OCI is such a case.

OCI said it would restructure its business, but the market also views this as a move to strengthen the control of Vice Chairman Lee Woo-hyun, a member of the owner family.

Hyundai Department Store is a similar case.

'Hanmu Shopping,' a joint venture between Hyundai Department Store and the Korea International Trade Association, is a highly profitable company generating about 200 billion KRW annually in cash flow.

Hyundai Department Store split into Hyundai Department Store Holdings (newly established company) and Hyundai Department Store (surviving company), placing Hanmu Shopping as a subsidiary of Hyundai Department Store Holdings.

Because of this, the market interpreted that "the real purpose of Hyundai Department Store's spin-off is to utilize Hanmu Shopping for the benefit of major shareholders."

Spin-offs are major matters that directly affect shareholders.

If you invested because you saw growth potential in a core business division of a company, but that division is spun off into a separate company, your investment purpose may be lost.

However, you should not automatically assume spin-offs will lead to stock price declines and be fearful.

You should also avoid the mistake of failing to see the essence of the business just because stock prices show temporary weakness after the spin-off.

In the world of investment, you see as much as you know. We support the wise investments of all beginner investors today as well.