In the event of a corporate spin-off, how can I calculate the correct cost basis for each company's shares?

Question

Consider this example:

Siemens is going to have a spin-off (next Monday). If I owned, say, 10,000 shares of Siemens bought at an average price of 80 euros, my cost would be 800,000 euros. In the spin-off, for every 10 shares of Siemens, I will get 1 share of the company OSRAM Licht AG. So, I would get 1,000 shares of OSRAM.

How can I correctly split my original costs between the shares I'll have in both companies?

I was thinking perhaps this way:

On July 5th, 2013 on the Frankfurt Stock Exchange, the closing price for Siemens was 78 euros. Assuming the price on Monday, July 8th, drops to 75 euros (ex-spin-off price), then the market price drop from 78 to 75 euros can be assumed "adjusted" due to the spin-off.

Should I multiply 3 euros by 1,000 OSRAM Licht AG shares, and deduct 3,000 euros from 800,000 euros to re-value my Siemens shares, to 797,000 euros? And value the cost of my OSRAM Licht AG shares at 3,000 euros?

Or, is calculating the cost basis for shares due to a spin-off not as simple as this, and other information is necessary? If so, what do I need to know?

Answer 1

Having all of the numbers you posted is a start. It's what you need to perform the calculation. The final word, however, comes from the company itself, who are required to issue a determination on how the spin-off is valued.

Say a company is split into two. Instead of some number of shares of each new company, imagine for this example it's one for one. i.e. One share of company A becomes a share each in company B and company C. This tell us nothing about relative valuation, right? Was B worth 1/2 of the original company A, or some other fraction?

Say it is exactly a 50/50 split. Company A releases a statement that B and C each should have 1/2 the cost basis of your original A shares.

Now, B and C may very well trade ahead of the stock splitting, as 'when issued' shares. At no point in time will B and C necessarily trade at exactly the same price, and the day that B and C are officially trading, with no more A shares, they may have already diverged in price.

That is, there's nothing you can pull from the trading data to identify that the basis should have been assigned as 50% to each new share.

This is my very long-winded was of explaining that the company must issue a notice through your broker, and on their investor section of their web site, to spell out the way you should assign your basis to each new stock.

Answer 2

I was doing my taxes in the US (called Form 1040) and wanted to find out how to figure out the cost basis for the $3.006 that I received for each Siemens ADR that I hold in July 2013. I found that the cost-basis allocation ratio is as follows:

• Siemens AG: 96.48%
• Osram Licht AG: 3.52%

Thus for the original poster the cost-basis is:

• Siemens = 800,000 * 96.48% = 771,840 euros
• Osram = 28,160 euros

Hope this helps someone.

Answer 3

From my understanding:

Original Holding: Siemens - 10,000 units at 80 Euros/unit Cost = 800,000 euros

Spin-off: Every 10 Siemens get 1 OSRAM

On July 5th, 2013: Siemens closing - 78 Euros

On Monday, July 8th: Ex-date (opening) - 75 Euros

Hence: Market value for:- 1. Siemens: 75 * 10,000 = 750,000 euros 2. OSRAM: (10,000 / 10) * (78 - 75) = 3,000 euros

Total Market value = 780,000 + 3,000 = 753,000 euros

Ratio for: 1. Siemens = 750,000 / 753,000 = 0.996015936 2. OSRAM = 3,000 / 753,000 = 0.003984063

Cost for: 1. Siemens = 800,000 * 0.996015936 = 796,812.75 2. OSRAM = 3,187.25