| Stub origin | Typical size | Liquidity profile |
|---|---|---|
| Post-LBO stub | 1-10% of original equity post-take-private | Very thin; days between trades; wide bid-ask |
| Post-spinoff parent | Variable; depends on parent's retained stake | Modest; rebalancing-driven forced selling at distribution |
| Recap stub | Variable; the leftover after a debt-funded distribution | Modest; trades on remaining cash-flow potential |
| Bankruptcy-emergence stub | Whatever equity survived restructuring | Often illiquid for 6-12 months; analyst coverage thin |
| Contingent Value Right (CVR) | Not a stub per se but related: a security that pays on a specified event | Highly variable; CVR-payment trigger determines value |
The Pershing Square / Ackman bet on Allergan stub (2014-2015), and the various LBO-stub trades through the 2000s, are the canonical case studies. The textbook structure: PE consortium acquires 90-95%, leaves a public stub at $10/share which represents (in math terms) the going-private company minus the cash-out paid. The stub then trades at $6-8 in the first 6 months due to selling pressure, then re-rates to $11-12 as cash flow stabilizes and analyst coverage returns.
Stub trading requires PATIENCE. The mispricing-correction window is typically 12-24 months. During the window, the stub may trade DOWN further, trade flat, or move in either direction on news. Position-sizing matters: a stub bet at 5% of portfolio that gets cut in half is a 2.5% portfolio drag -- recoverable. A stub bet at 20% of portfolio that gets cut in half is an 10% portfolio drag -- the kind of position-sizing error that ends careers. Stubs are tail bets; size them like tail bets.
A stub is the public equity sliver left after a partial cash-out. The systematic mispricing is the trade: stub gets sold off by holders cleaning up portfolios, then re-anchors as fundamentals normalize. Allergan / Dell pre-EMC are canonical case studies. Patience + position-sizing discipline are the requirements; the trade is a tail bet not a core holding.
Sit with the ideas.
A leveraged buyout consortium pays cash for 95% of a public company's shares but leaves a 5% 'stub' equity traded on the exchange post-transaction. What is the most likely reason for the structure?