I am trying to understand whether or not there is a standard model of convergence in the arbitrage scenario of negative stub models, i.e. when the market value of a company is valued less than its ownership stake in a publicly traded subsidiary.

For example, let's say Company A has 10,000,000 shares worth \$5 each, and organizes an IPO spin-off for a subsidiary asset, Company B. The IPO will sell 20% of the shares and Company A will redistribute the remaining 80% to their own shareholders. Company B IPOs with 7,500,000 shares worth \$15 each, and Company A's share price increases to \$8. In this case, Company A's holding in Company B is worth \$90mm (80% of 7.5mm shares * \$15), while their implied valuation is only \$80mm (the original 10mm shares times the new price of \$8). This creates a stub value of -\$10,000,000.

Ok, I'm clear so far. But my question is, how does the convergence of these two assets proceed over time? Do both share prices converge to the mean? Does the value of Company A increase over time to account for the new assets? Does Company B lose value because the Company A holdings are a better representation of value? Is there no consistent pattern of convergence and it completely depends on the individual case?

Thanks in advance for any insight on this!


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