Spinoff

You know Big Bang Theory, right? Most popular sitcom in the world. Well, its spinoff was Young Sheldon. And yeah, the jury’s still out on that one. Remember Happy Days? Ask your parents. Laverne and Shirley came out of it. Frasier came from Cheers. Lou Grant came from The Mary Tyler Moore Show. A Different World came from The Cosby Show. As did about 14 lawsuits.

Well, corporate America has spinoffs that kind of work the same way.

A dorky, old, unsexy home building company, BuildCo, which grows slowly and predictably, and trades at 12 times earnings stumbles on a way to leverage robots to build homes for them. They make more money licensing this build technology to the world than their own home building business.

The robot home build company is only 5 percent of the revenues of the home build part of the business. But it’s growing at 300 percent a year instead of 6 percent. On its own, that robot company, as a stand-alone company, would trade at some 50 to 100x earnings. And on its own is worth probably half of the 83-year-old home building company already.

Yet BuildCo gets almost none of the credit in its multiple, because it’s still relatively small in the scheme of things and wants to work for shareholders, i.e. get them full value for their investments.

So to optimize its value to shareholders, the company spins off that robot build company into A.I.A.I.O., which then trades at a huge multiple by selling 20 percent of it to the public. BuildCo then owns 80% of whatever A.I.A.I.O. is valued as being worth by the public markets, after it was spun off from the mothership.

Almost certainly, A.I.A.I.O. trades at a vastly higher multiple than did its mothership conglomerate. The new value of the spinoff, and the mothership’s 80% ownership stake in it, causes BuildCo’s stock price to almost double.

And how was all of this magic accomplished?

The spin off. By forcing the public to put a valuation on this otherwise hidden asset, the company added some 15...20...30 percent to its market cap, which is a good thing for shareholders.

Maybe not so good for the human workers of the build company, but we’ll all work for robots someday anyway so uh... might as well get some practice being subservient...