Greenblatt Spin-Off Plays - Host Marriott, Strattec, and Hidden Value

When corporation splits itself in two, Wall Street panics. Institutions dump shares they do not understand. Index funds sell because new company does not fit their mandate. And somewhere in the wreckage, a few people with patience and a calculator find one of the most reliable ways to make money in the stock market.

Spin-offs outperform the broader market. Consistently. The reasons are structural: forced selling creates artificially low prices, and the newly independent business finally gets proper attention from analysts. Four real situations – two spin-offs that worked beautifully, and two merger arbitrage deals that demonstrate why chasing small spreads with big downside is a terrible idea.

Host Marriott – Buying the Toxic Waste

During the 1980s, Marriott Corporation went on a hotel building spree. Build hotels, sell them, keep the management contracts. Great model – until real estate crashed in the early 1990s and Marriott was stuck with unsalable hotels and billions in debt.

The solution was elegant and ruthless. Split the company in two. Marriott International gets the profitable management contracts, nearly debt-free. Host Marriott gets all the real estate and essentially all the debt. The “good” Marriott and the “toxic waste.”

Think about what happens next from the institutional investor’s perspective. You bought Marriott for the capital-light management business. Now you own shares in a leveraged real estate company loaded with debt. Too small – Host would represent only 10 to 15 percent of the combined value. Wrong industry. Wrong risk profile. Your compliance department is sending memos. You sell. Everyone sells.

The selling has nothing to do with investment merits. It is mechanical. Forced. The stock price drops not because the business is worthless, but because nobody wants to be caught holding it.

Three things made this a compelling buy despite the apparent ugliness.

First, insiders were not running away. Stephen Bollenbach, the financial architect who designed this entire split – the man who had just helped Donald Trump turn around his gambling empire – chose to become CEO of Host Marriott. The “bad” half. Think about that. The guy who figured out how to throw the debt overboard voluntarily jumped into the lifeboat with it. That does not happen unless the lifeboat is more seaworthy than it looks.

Second, the Marriott family still owned 25 percent of Host after the spin-off. They designed this deal to free up Marriott International, yes. But they were not going to torch a quarter of their own wealth. Marriott International was also required to extend a 600 million dollar line of credit to Host. The interests were aligned.

Third, the leverage created an asymmetric payoff. Host at 5 dollars per share with 25 dollars of debt meant total asset value of about 30 dollars. A 15 percent increase in asset values nearly doubles the stock. Fifteen percent down and you are wiped out. But with everyone incentivized toward survival, total collapse was unlikely.

Host Marriott stock nearly tripled within four months. The “toxic waste” turned into gold for anyone who read the SEC filings while everyone else panic-sold.

Strattec – The Lock Company Nobody Wanted

If Host Marriott was about leverage and contrarian courage, Strattec was about finding a hidden growth catalyst buried in an SEC filing that almost nobody read.

In May 1994, Briggs and Stratton – the small engine manufacturer with a billion dollar market cap in the S&P 500 – announced it would spin off its automotive lock division. This tiny unit represented less than 10 percent of total sales. The spin-off company, Strattec Security, would have a market capitalization under 100 million dollars.

Classic set-up for institutional dumping. Briggs was in the S&P 500, so every index fund owned it. The spin-off would be too small for most institutional portfolios. Making car locks has nothing to do with making lawn mower engines. And manufacturing parts for automakers is generally considered a terrible business.

Why was the parent doing this? The answer was right on the first page of the SEC Form 10 filing. The board wanted Strattec’s managers to own stock tied to their own business performance, not be an invisible line item inside a giant engine company. Over 12 percent of Strattec shares were reserved for employee stock incentives. Management was going to eat their own cooking.

Pro-forma financials showed earnings of 1.18 dollars per share. Comparable auto parts companies traded between 9 and 13 times earnings, putting fair value between 10.62 and 15.34 dollars. Not spectacular on its own.

The real discovery was buried in the “Business of the Company” section. Strattec was the dominant lock supplier to General Motors – about 50 percent of sales. They supplied nearly all of Chrysler’s locks – another 16 percent. And then this sentence: Ford was expected to become Strattec’s second-largest customer during fiscal 1996.

Ford. Bigger than Chrysler. More than 16 percent of revenue. And none of this Ford business was included in the historical earnings numbers being used to value the company. Strattec was not a mediocre auto parts supplier – it was the dominant player in its niche, with a major new customer coming online that the market was completely ignoring.

For months after the spin-off, Strattec traded between 10.50 and 12 dollars – the low end of industry valuations, completely ignoring the Ford business, the dominant market position, and the recent 10 percent earnings growth. By year-end 1995, the stock hit 18 dollars. A 50 percent gain in under eight months. From reading an SEC filing.

Harcourt Brace Jovanovich – When the Ground Literally Disappears

Now for the other side. Merger arbitrage sounds wonderful on paper. Company A agrees to buy Company B at a premium. You buy Company B below the acquisition price, wait for the deal to close, collect the spread. Annualized returns of 40 to 50 percent. What could go wrong?

In April 1985, Harcourt Brace Jovanovich agreed to acquire Florida Cypress Gardens, a theme park. Each share of Cypress Gardens would be exchanged for 0.16 of a share of HBJ stock – buyout value of 8.30 dollars. Cypress Gardens traded at 7.50 after announcement. An 80-cent spread. Chairman owned 44 percent of shares, so approval was guaranteed. No financing risk, no regulatory issues. Three months to closing.

The math: 80 cents on 7.50 in three months. Annualized, nearly 50 percent. The risk: deal collapse means Cypress Gardens falls back to 4.50 or lower – risking 3 dollars to make 80 cents. Since HBJ paid in stock, you hedge by shorting 0.16 shares of HBJ for every Cypress Gardens share. Textbook.

Then a few weeks before closing, Florida Cypress Gardens fell into a sinkhole. Literally. The ground collapsed. The main pavilion dropped into a hole. “Sinkhole risk” was not on anyone’s checklist.

The deal got delayed. Meanwhile, HBJ stock had climbed to 60.75 dollars – the shorted position was now underwater by 1.42 dollars per share. If the deal collapsed entirely, total loss: 6.42 dollars on a 7.50 investment. All for that 80-cent profit.

The deal eventually closed at a reduced 7.90 dollars per share. After covering short position losses, net result was about a one dollar loss over five months. A “successful” merger arbitrage deal that lost money.

Ryan Insurance – When an 80-Year-Old Changes His Mind

If sinkholes seem unlikely, this one is even more absurd. In July 1982, Combined International agreed to acquire Ryan Insurance Group for 34 dollars per share. Patrick Ryan, who owned 55 percent of Ryan Insurance, would become CEO of the combined company. Combined’s 80-year-old founder, W. Clement Stone, would step down. Both shareholder votes scheduled for just two months out.

The spread: buy at 32, collect 34 at closing. Two dollars on 32 in two months annualizes to 44 percent. The downside? Ryan traded at 18 before the deal. If it fell apart – 14 dollar loss to make 2 dollars.

Everything proceeded perfectly until W. Clement Stone, famous for his “positive mental attitude” philosophy, grabbed a microphone at the shareholder meeting and declared he had changed his mind. He did not want to give up his company. The merger vote was adjourned. Stock dropped. Stomach churned.

Stone and Ryan eventually worked it out the same day, after markets closed. The profit was salvaged. But the lesson was clear: in merger arbitrage, you need everything to go right for a small profit. Any one of a thousand things can go wrong for massive downside. An octogenarian’s ego. A sinkhole. A market crash. One bad deal wipes out ten good ones.

The Patterns

Across these four investments, a clear hierarchy emerges.

Spin-offs create structural mispricings. Forced selling by institutions, index funds, and portfolio managers who do not want the new entity generates artificially depressed prices. The mispricing is predictable and repeatable. You find it by reading SEC filings and checking three things: Why are insiders staying? How are they compensated? What is the market missing?

Merger arbitrage creates fragile positions. You bet on a specific event happening exactly as planned. The upside is capped at a small spread. The downside is a return to pre-deal prices – which can be catastrophic. Any unexpected event, no matter how absurd, can destroy the entire position. The math works on average, but a single outlier event can ruin a year of careful work.

Key Takeaways

Follow the insiders, not the institutions. When institutions are forced to sell for non-investment reasons – wrong size, wrong sector, wrong mandate – and insiders are simultaneously loading up on stock, you have a structural mispricing. Bollenbach choosing Host Marriott. Strattec management getting 12 percent of shares. These are signals that matter.

Leverage is a weapon that cuts both ways, but in spin-offs the odds can tilt your way. Host Marriott had massive debt, but also massive alignment of interests. The Marriott family, the credit line, the CEO – everyone was incentivized to make it work. When leverage is paired with aligned incentives, asymmetric upside becomes probable, not just possible.

Read the SEC filings that nobody else reads. Strattec’s Ford contract was sitting right there in the Form 10. It was not hidden. It was not secret. It was simply ignored because nobody bothered to read the filing for a 100 million dollar auto parts spin-off. The edge was not intelligence. It was effort.

Avoid risking large losses for small gains. Merger arbitrage inverts the equation you want. You want situations where small losses lead to large gains, not the reverse. A sinkhole swallowing a theme park, an elderly CEO grabbing a microphone – these are not risks you can model. When one surprise can destroy your position, the expected value is worse than any spreadsheet shows.

The best investments come from structural inefficiencies, not from betting that everything goes perfectly according to plan.