<FOOLISH FOUR PORTFOLIO>

Spin-Offs
GM has a baby!

by Ann Coleman (TMF AnnC)

General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> is spinning off its huge and very profitable former parts division, Delphi Automotive Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DPH)") else Response.Write("(NYSE: DPH)") end if %>, into a separate corporation effective May 28. A bit less than 20% of Delphi was sold to the public in an IPO last January, so the company is already trading on the New York Stock Exchange. At the end of May a whole lot more shares will be available for trading, but they will not be sold to the public directly. Instead they will be distributed to owners of GM stock. Click here for the GM press release: General Motors News | Press Releases

(By the way, in the press release and other news stories that picked up the press release you will see GM's stock referred to without explanation as "$1-2/3 per share par value common stock." There are other types of General Motors common stock -- General Motors Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>, for example -- but none of those others trades as GM. You can just see 'em thinking: "Let's confuse people and claim we were just being specific!")

For every share of GM stock owned as of the close of business on May 25 (more about that later), shareholders will receive 0.7 share of Delphi. Own 100 shares of GM, get 70 shares of Delphi. What a deal. In this case it is really quite a deal, because GM has also announced that they will not be cutting their dividends after the spin-off. That means that GM's management expects earnings to be strong enough to support that dividend even without Delphi's considerable contribution to its bottom line.

Now, since this spin-off has been in the works for quite some time, GM may have refrained from raising their dividend. The company has been doing quite well, and a dividend increase would not have been unusual considering the earnings growth. Still, management is obviously signaling that it expects the company to continue to do well with Delphi as a partner instead of a part of the company.

Many Fools are still holding GM in their Foolish Four portfolios -- and they are probably glad they are. But hang on to your hats, because you will see GM drop on the day of the spin-off. You won't lose money, but if you aren't prepared, it could be a bit shocking. Here's what happens. On the May 28, Delphi will officially spin off from GM. Every shareholder of GM's regular common stock will receive 0.7 shares of Delphi. GM is currently selling for around $92, and Delphi is currently selling for around $20.

If on May 28th DPH is still selling for around $20, the NYSE will subtract $14 from the price of GM. At the same time, every GM shareholder who is listening closely will hear the slight "plop" of Delphi shares landing in their account. The value of the Delphi shares will exactly equal the amount that their GM shares were reduced by. Nothing will be gained or lost in the transaction, and except for the value of fractional shares, which may be paid in cash, the transaction will not be a taxable event.

Speaking of taxes, spin-offs can cause lots of headaches down the road if you don't take careful notes at the time. Two things happen. Your cost basis in GM is reduced by the pro rata value of the Delphi shares (no, unfortunately, you don't just subtract $14 per share, or whatever, from your GM cost), and your Delphi shares acquire a cost basis based not on their value on spin-off day, but on their pro rata value as of the day you bought GM. This gets complicated, but I promise I will deal with it fully after the split, when we have some solid numbers to work with.

About May 25th... All spin-offs and splits are worded the same way: The split will go "to shareholders of record as of" some specific date. The date is known as the record date and was important back when corporations compiled lists of shareholders on a certain date then "closed the books" to any changes until after the split or spin-off or dividend or whatever was paid.

Nowadays, computers track all these transactions, and brokers adjust ownership as necessary. If you buy GM between the 25th and the 28th and you pay the full price for your GM shares, you WILL GET the Delphi shares. If you sell GM after May 25 but before the price adjustment takes place, you WILL NOT GET the Delphi shares. Your stock will be sold with the understanding that the Delphi shares will transfer to the new owners, since they are paying for them. Brokers worked all this out long ago in the interest of an "orderly market."

Fool on and prosper!


Today's Stock Lists | 1999 Dow Returns

05/03/99 Close
Stock  Change   Last
--------------------
CAT  +  13/16  65.19
JPM  +2  5/8   137.38
MMM  +4  7/8   93.88
IP   +2  1/16  55.38




                Day   Month    Year   History
        FOOL-4   +2.99%   2.99%  32.80%  34.78%
        DJIA     +2.09%   2.09%  20.35%  19.88%
        S&P 500  +1.46%   1.46%  10.52%  10.79%
        NASDAQ   -0.29%  -0.29%  15.64%  17.22%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     65.19    51.32%
 12/24/98    9 JP Morgan    105.51    137.38    30.20%
 12/24/98   14 3M            73.57     93.88    27.60%
 12/24/98   22 Int'l Paper   43.55     55.38    27.15%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1564.50   $530.50
 12/24/98    9 JP Morgan    949.62   1236.38   $286.76
 12/24/98   14 3M          1030.00   1314.25   $284.25
 12/24/98   22 Int'l Paper  958.12   1218.25   $260.13

              Dividends Received      $29.45
                             Cash     $28.26
                            TOTAL   $5391.09

</FOOLISH FOUR PORTFOLIO>