One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a corporate subsidiary. The parent company can either sell stock in the new company to the public, or spin it off—hand the stock out to its own investors.
Often, the parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.
In our experience, and in most academic studies of the subject, this helps the parent and its corporate spinoff. Both generally do better than comparable companies for at least several years after the spinoff takes place.
When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate company, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend, or give its shareholders an opportunity to swap shares of the parent company for the shares of the newly established spinoff.
Study after study has shown that after an initial adjustment period of a few months, stock spinoffs tend to outperform groups of comparable stocks for several years. (For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.) The above-average performance of spinoffs makes sense for a couple of reasons.
First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.
Second, spinoffs involve a lot of work and legal fees. Companies only have an incentive to do spinoffs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.
Quite often, a big company will spin off a small subsidiary because it feels the subsidiary is a tiny gem, but that it’s too small to make an impact on the much larger financial statements and market capitalization of the parent.
At TSI Network we’ve had great success with a number of spun off stocks over the years. That’s especially true of the many spinoffs we have recommended that have gone up after they began trading, and have later attracted a takeover bid at a substantial premium over the market price.
Needless to say, things don’t always work out this well. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in investing, spinoffs are the closest thing you can find to a sure thing.
Some new corporate spinoffs are a target for value seekers, while new stock issues often pose problems
You can contrast corporate spinoffs with new stock issues, which is when a company first sells shares to the public.
The two situations are like two sides of a.. Read More
Savvy investors who track upcoming spinoffs position themselves to tap the market’s best performers
As a general rule, for any upcoming spinoffs we like, it’s better to buy more of any shares you receive, rather than selling them. In fact, a number of studies have shown… Read More
Value seekers target stock spinoff investments because they recognize the potential long-term gain
Seekers of undervalued stocks are most likely to read the voluminous material that companies hand out as part of the stock spinoff process. They’re also most likely to buy a stock spinoff… Read More
What is a spinoff and why would you want to own one? Studies show that spinoffs often outperform comparable stocks.
What is a spinoff? A spinoff occurs when a company sets up one or more of its divisions or subsidiaries as an independent company, then hands… Read More
EDGEWELL PERSONAL CARE $74 (New York symbol EPC; Consumer sector; Shares outstanding: 57.4 million; Market cap: $4.2 billion; Takeover Target Rating: Highest; No dividends paid; TSINetwork Rating: Average; www. edgewell.com) began trading in July 2015 after Energizer Holdings, Inc. split into Edgewell… Read More
Stock spinoffs can become some of the biggest undervalued stocks in the market
We can still say without reservation that, in investing, stock spinoffs are the closest thing you can find to a sure thing.
When a company carries out a spinoff, it sets up one of… Read More
It’s important to follow our investing guidelines when you look at new issues—and spinoffs
Investing guidelines and rules of thumb can help you make better investment decisions. But to profit most from any one guideline, you need to understand why it works. That way, you can… Read More
In today’s report, we look at a company that is the product of a successful spinoff. In October 2012, Kraft Foods split its North American grocery business away from its global snacks business, which became Mondelez International. Both stocks did well, until… Read More
Today, we look at a packaged food producer that has some of the strongest brands in the grocery store, such as Chef Boyardee pasta. ConAgra Foods’ sales to consumers make up 70% of its business, and the company is catering to changing… Read More
A corporate spin-off and a new issue or IPO are like two sides of a coin—one favourable to investors, the other unfavourable
From time to time, companies set up one or more of their divisions or subsidiaries as an independent firm, then hand… Read More
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