How breakups impact shareholders, market vs. limit. We got answers

by newsconquestSeptember 10, 2023088

Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Question 1: I’m newer to investing and don’t understand all the different ways a stock splits when a company breaks apart. I bought BHC because I thought my shares would be broken apart and some would become BLCO. Why didn’t that happen? Thanks. — Ted Great question, Ted. Hang tight: You will receive BLCO shares — eventually. First, a quick review of the three (OR FOUR?) basic ways companies divest business units. A carve-out occurs when a company sells shares in the separated unit into the open market via an initial public offering (IPO). A spin-off is when management distributes shares of the new company to exiting shareholders via a special dividend. A split-off gives existing shareholders the option to receive shares in the new entity in exchange for shares in the parent company. The tax implications of these moves for shareholders vary, and often depend on how much of the subsidiary is divested by the parent. For example, spin-offs and split-offs may be tax free so long as the parent sells off 80% or more of the subsidiary and meets other requirements as laid out in section 355 of the Internal Revenue Code. Companies often use more than one of these options. In the case of Bausch Health (BHC), management chose to carve out Bausch + Lomb (BLCO) by selling about 12% of the company in the open market through an IPO. The company is now working on plans to divest the rest of BLCO through a spin-off of at least 80% of the company. BHC currently has a just under 90% stake in BLCO. Once that happens, you should receive your shares in BLCO, it’s just (unfortunately) taking longer than expected. Another recent example is Johnson & Johnson (JNJ), which also carved out 10% of Kenvue (KVUE) and sold it via an IPO. However, unlike BHC, JNJ went for a split-off by making a tender offer to existing shareholders for at least 80.1% of Kenvue shares (to avoid taxes). You would have needed to opt in to exchange shares of JNJ for shares of KVUE through your brokerage prior to expiration of the exchange offer. At General Electric (GE), management opted for a pure spin-off of both the health-care division GE HealthCare (GEHC) and GE Verona, which is expected to finalize at some point in early 2024. In the case of GEHC, GE management spun off 80.1% of the company to existing shareholders via the distribution of one share of GEHC for every three shares of GE common stock held at the time. Question 2: What type of order does the Trust use: market or limit? Limit orders are the safer way to place a trade because you can determine exactly how high you are willing to go for a buy (bid), or how low you are willing to accept on a sale (ask). For this reason, we do recommend using limit orders, especially in volatile markets when prices are swinging wildly and bid-ask spreads — the difference between the highest bid and lowest ask — expand. The Club is 100% committed to taking action once a decision has been made and an alert has been sent out, so we use market orders for all buys and sells. Sometimes, this hurts our performance but because we told members what we were doing, we must do it, no matter the price in the market at the time our restriction is lifted. We always wait 45 minutes after a trade is posted to the site to actually enter the market order. Members are not committed in this way and may decide to hold off on a buy if the price has advanced meaningfully between the time of our alert and the time you go to enter the trade. You can hold off on selling if the price has dropped quickly. We simply do not have that luxury and because out priorities are education and transparency — over total return — we use market orders. (See here for a full list of the stocks INJim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

The company logo for Kenvue Inc. Johnson & Johnson’s consumer-health business, is displayed on during the company’s IPO at the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2023.

Brendan Mcdermid | Reuters

Question 1: I’m newer to investing and don’t understand all the different ways a stock splits when a company breaks apart. I bought BHC because I thought my shares would be broken apart and some would become BLCO. Why didn’t that happen? Thanks. — Ted

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