NEW YORK (AFX) - When Cendant Corp. split into three companies, shareholders were scrambling to decide which business they wanted to maintain stakes in. And many investors were able to broker transactions before the first day of trading.
The New York Stock Exchange and Nasdaq Stock Market permit shareholders to buy and sell shares of companies whose stocks are splitting, or that are spinning off divisions or emerging from bankruptcy. Called a 'when issued' market, shares act like forward contracts ahead of their first day of trading.
Analysts who track the market say it is increasingly becoming a way for savvy investors to get in on a stock before the general public catches on. But it's not without risks.
'If you're speculating, you are looking to get in, and get out right away,' said Howard Silverblatt, senior index analyst at Standard & Poor's. 'The anticipation with a spinoff or an IPO are always better than the event, so 'when issued' lets you get in early.'
However, Silverblatt said 'if you're an investor and believe in the stock, you want to get in quicker because the stock will have additional activity when it lists. But this also has a downside if the stock loses favor in the days leading up to the listing.'
Stocks that are about to be split, or that are about to have spinoffs, begin trading on the when issued market about seven days ahead of the start of secondary trading. Investors who buy when issued shares can't close the transaction until its first day of trading, and are essentially locked until then.
This could reap big rewards if shares surge during the when issued period, and could leave some investors holding the bag. The most recent example being Cendant -- which spun off its hotel and real estate businesses.
Wyndham, one of the largest hotel franchisors in the nation, had some 6.6 million when issued shares exchange hands before its Aug. 1 opening on the New York Stock Exchange. During that time, shares of the company, which operates the Super 8 and Days Inn brands, rose 3 percent.
Meanwhile, real estate spinoff Realogy -- which owns Century 21 and Coldwell Banker -- saw share volume peak 11.7 million before its first day of trading. The stock fell 2.3 percent in that time.
One pattern seen throughout the when issued market is that stocks often trade with considerable volatility. Much of this is because institutional investors who run index-oriented funds use the period to move in or out of stocks before they officially open.
Perhaps one of the most volatile this year was local telephone services company Embarq Corp., which was spun off from Sprint Nextel. The stock opened at $51 in trading before its official open, then dropped 14 percent that day alone.
So, what's ahead? 'There's a lot more deals coming,' Silverblatt said.
Sara Lee Corp. is planning to spin off its Hanesbrands division Sept. 6. The business will include Hanes, Champion, Playtex and Wonderbra brands, and will trade under the symbol HBI on the New York Stock Exchange.
First Data Corp. plans to spin off its Western Union consumer payments business during this year's second half. Another upcoming spinoff is Alberto-Culver Co., which plans to float beauty supplies distribution business Sally Beauty Co.
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© 2006 AFX News
