What Happens to a Stock If Parts of the Company Are Sold?

Save

If a part of a company is sold it will affect the stock price, but how depends on the transaction and its financial impact on company profitability. The business transaction may cause the stock price to go up, down, remain the same or simply reflect the new ownership situation.

Improved Profitability

Companies routinely dispose of unprofitable parts of the business to improve profitability. If selling an unprofitable part boosts profitability, the stock price may go up. The buyer of an unprofitable operation may see value in the purchase because it may help eliminate competition, complement or expand its own business or present a bargain because the buyer may see an area where the seller has failed.

Discontinued Operations

Sometimes a company announces its intent to divest an unprofitable business but has a hard time finding a buyer. To show the investors the benefits of the divestiture, it may classify the operations it intends to get rid of as “discontinued,” although for all intents and purposes they are still a part of the company. This accounting trick allows the company to immediately report improved profitability from “continued operations.”

Initial Public Offering

A company may segregate a line of business that is particularly profitable into a separate company and sell the stock to investors in an Initial Public Offering. The seller may only offer 10 percent or so of the new company while retaining the remaining 90 percent. The IPO allows it to establish a market price for the new stock that will apply equally to the remaining 90 percent which it still owns, boosting the seller’s balance sheet and its stock price and creating an opportunity to sell more stock for a profit later. There have been instances where the market value of such an IPO was greater than that of the entire parent company.

Spinoff or Breakup

A company may feel that the market is not fully valuing its stock based on all the diverse parts and decide to break itself up into two or more companies. In such a transaction, the company creates separate stocks for different parts of its business and spins them off to the existing shareholders. The sum total of the newly created stocks will initially equal the value of the old stock, but when the separate stocks start trading, investors may bid up their prices so that the sum total of the parts may become greater than the value of the old whole.

Related Searches

References

  • “One Up on Wall Street”; Peter Lynch; 2000
  • “Security Analysis”; Benjamin Graham, David Dodd; 2008
  • "The Only Three Questions That Count”; Ken Fisher; 2007
Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!