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Fannie Mae

Article by Stella T.

Fannie Mae–Spin-offs

One of the most confusing things in a Wall Street conversation is to have a woman’s name suddenly inserted–“Fannie Mae.” You can be pardoned for being at a complete loss and for wondering who in heck she is. You may even mentally picture her as a sort of financial Raquel Welch.

It is therefore a terrific letdown to learn that “Fannie Mae” is the popular name for the Federal National Mortgage Association. The name somehow evolved from the sound of the initials F.N.M.A. And everybody uses it. You find it inThe PVall Street Journal headlines, “Fannie Mae Tops Bureau”- (an interesting headline if you didn’t know Fannie’s identity), and is even used in quotes of high government officials and top businessmen. Seems sort of too had to have a woman whose name is on every tongue turn out to be nothing more than a prosaic old mortgage association.

The term spin-off makes you think of an object whirling so rapidly that parts of it come loose and are lost. And after a fashion, minus the whirling business, that’s what the term means in stock market lingo. A company decides to rid itself of one of its subsidiaries or one of its divisions, and does so by turning it over to the stockholders–who own it already as owners of the parent company.

It does this by forming the subsidiary or division into a new company and then giving the stock in the new company to the stockholders in the old company, one share for each so many shares of the old company that they already own.

Why do they do this when the value of the new stock is exactly equal to the decrease in value of the old stock? It seems obvious that nobody has gained anything.

There can be any number of reasons. Management may have found that the subsidiary or division dealt in such a completely different commodity from the parent company that managing it took them at an angle away from the main thrust which they looked on as their direction of future growth. Howmet Corporation, a metals concern, spun off its surgical and dental division for such a reason in 1970. The new corporation was called Howmedica.

Financing for the subsidiary or division may somehow get in the way of planned financing for the parent company. But mostly the reason has to do with the government. The Justice Department may be about to bring an antitrust suit against the parent company for having created “a monopoly in restraint of trade.” The department may have agreed to withdraw the suit if management will spin off the subsidiary and thus bring a new company into the field to compete against the old company.

Or–a different kind of spin-off–the parent corporation may own a large block of stock in a rival company or in a company with which they do business. The Justice Department may take a dim view of this and threaten suit to make them divest themselves of (get rid of) this block of stock. To avoid a lawsuit the company may spin off the stock to its stockholders, again one share for each so many shares of stock already owned. This happened not so many years ago to duPont. They owned a large block of General Motors, a company with whom they did business. They spun off the General Motors shares to their duPont shareholders.

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