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So I'm curious about the reasons that a company spinning off a portion of itself would result in such a dramatic rise (or potentially fall) in stock price. Is it just a matter of investors being more confident that under the new organisation, the two resulting companies will be leaner and ultimately perform better (or worse, if we're talking about a stock drop).

My questions was triggered by the 20%+ stock price increase following the announcement that the Gap will split up into two different companies, so if there's any reasons specific to this announcement, I'd love to learn about them.

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Management inefficiencies can cause better or worse performance in separate companies versus combined. Separate companies might allow businesses with different characteristics to be managed individually without the distraction of trying to integrate them, or alternatively might involve duplication of similar functions that could be streamlined in a combined company.

In the Gap example, it has been suggested that the businesses have differences that motivate the breakup:

At this point, the separation probably makes sense. Executives had for some time been managing Gap and Banana Republic as mature brands, rather than high-growth ones. Old Navy, meanwhile, still shows plenty of opportunity for expansion. Perhaps Peck and his team can be more focused on healing the troubled labels when it is their sole mission. Meanwhile, Old Navy has always courted a value-oriented customer; perhaps it can better sharpen its overtures to that group when it is no longer part of a company that’s also trying to appeal to more affluent shoppers.

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Whenever there is a split, spinoff, merger or sales of part of a company; or whenever a company announces layoffs, store closings, or expansions; the market reacts. Sometimes the stocks goes up in reaction, sometimes it goes down.

It can really get strange when the market has been expecting it, that can mean that the short-term reaction can be relief, or the market can yell "what took you so long"; and then the price move in the opposite direction to the view of the move.

Sometimes the spinoff is a sign that the two companies will perform better. Other times it is a move of desperation to save a portion of the company by splitting. Each situation is different.

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