The AMP Ltd (ASX: AMP) share price reacted positively to its demerger plans, but investors are left confused as to whether this is a buying or selling opportunity.
It looks like the pessimists are winning out with the AMP share price initially surging over 7% before losing momentum to trade 0.9% higher at $1.14 in the last hour of trade.
But history is on the side of AMP supporters as several research reports have noted that most demergers create value for shareholders.
Image source: Getty Images
Demerger history gives embattled AMP share price hope
One of these reports was released by Wilsons earlier this month. The broker believes that returns generated from such transactions can be meaningful.
"The empirical evidence on demerger event studies, both in Australia and overseas, validates that break-ups generally create shareholder value, for both the parent and the spin-off," said Wilsons.
"We have looked at 16 demergers since 2010, and in the majority of examples demergers create value during both the demerger period as well as post-demerger over the following 12 and 24 months."
Ugly duckings can turn into swans
What's surprising is that the entity that is being spun out usually performs better than the parent. Wilson found that these abandoned children have outperformed their parents by almost two times on average over a 12- to 24-month period.
Some of the divested entities that have outshone their parents two years post demerger include Dulux Group, which split from the Orica Ltd (ASX: ORI) share price; South32 Ltd (ASX: S32) share price after leaving BHP Group Ltd (ASX: BHP) and Virgin Money UK CDI (ASX: VUK) share price after being cut from National Australia Bank Ltd. (ASX: NAB).
Short-term pain for longer-term gain
Another research paper from Macquarie Group Ltd (ASX: MQG) also found that demergers can create buying opportunities for longer-term investors.
The broker found that ASX shares normally fall on the demerger announcement until the transaction is implemented.
It also noted that the performance of the child entity usually underperforms the broader market for the first six months. But this trend reverses and the child entity outruns the market.
"For the parent entity there is typically a short-term run-up into the demerger implementation followed by market performance post," said Macquarie.
"The parent entity has tended to outperform over the longer term (1yr plus)."
Other ASX shares with demerger ambitions
Given the number of other potential demergers on the ASX, these findings are reassuring. The Suncorp Group Ltd (ASX: SUN) share price, AGL Energy Limited (ASX: AGL) share price and Telstra Corporation Ltd (ASX: TLS) share price are a few examples.
There is one other implication from demergers that are relevant to ASX investors. The outperformance of demerger candidates is uncorrelated to the S&P/ASX 200 Index (Index:^AXJO).
Hidden benefit from demergers and spin-offs
"In many cases, the value creation, or shareholder return, is almost entirely controllable by the company, and is distinct from a strategy that relies on improving sales or operating margins," explained Wilsons.
"Corporate break-ups can provide investors with attractive returns, while also diversifying their sources of portfolio returns."
Given the volatility on the market, this point shouldn't be lost in the details.
