When you look in a mirror, you see things as the exact reverse of reality. That's what happened when I commented on the proposed spinoff of an Emdeon
The ailing Emdeon was spinning off its WebMDHealth
So how has WebMD done as a public company? It opened at $22 a share; almost five months later, it stands at more than $37 a stub, a sweet 68% jump in value. Nice call, Rich. As I said, I got it all wrong about this company's prospects -- and not simply because the price has gone up in the intervening months. The real explanation is a little more complex, but also glaringly simple once you figure it out, and it has to do with Joel Greenblatt.
Greenblatt is a Columbia Business School professor whose latest book, The Little Book That Beats the Market, has grabbed Wall Street's attention thanks to the simple Magic Formula he created to find winning stocks. Greenblatt previously wrote a book titled You Can Be a Stock Market Genius, which looked for winning investments in so-called "special situations." Those situations include mergers, restructurings, bankruptcies, liquidations -- and spinoffs.
Greenblatt notes that one of the things he looks for in spinoff situations is whether the parent company's management has a stake in the new firm's ultimate success. He pointed to the spinoff of Host Marriott
Instead of looking askance at Emdeon's ownership postion of WebMD Health, I should have seen that the parent would want its offspring to succeed. Emdeon was holding such a large stake because it anticipated great results from WebMD Health. While my diagnosis might have been appropriate for Emdeon (it's still an ailing company), it wasn't so for WebMD. Look here to see how the two companies have performed.
Of course, the size of management's stake in a spinoff is not enough to make an investment decision. You still need to read the prospectus and do some Foolish research to ensure that the company is a worthy investment. But I know that when I read about spinoffs from a sickly company in the future, I won't make any death pronouncements quite so quickly.
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