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.
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KAR AUCTION SERVICES INC. $25 (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 133.4 million; Market cap: $3.3 billion; Dividend yield: 5.6%; Takeover Target Rating: Medium; www.karauctionservices.com) sells used and… Read More
GAP INC. $18 (New York symbol GPS; Consumer sector; Shares outstanding: 378.0 million; Market cap: $6.8 billion; Dividend yield: 5.4%; Takeover Target Rating: Medium; www.gap.com) is a multi-brand apparel retailer based in… Read More
PERRIGO CO. PLC $44 (New York symbol PRGO, Manufacturing sector; Shares outstanding: 136.0 million; Market cap: $7.0 billion; Dividend yield: 1.0%; Takeover Target Rating: Medium; www.perrigo.com) took its current form in June… Read More
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SNC-LAVALIN GROUP INC. $27 (Toronto symbol SNC; Manufacturing & Industry sector; Shares o/s: 175.6 million; Market cap: $4.7 billion; Dividend yield: 1.5%; Takeover Target Rating: Medium; www.snclavalin.com) is a leading Canadian engineering and construction company that specializes in large-scale infrastructure… Read More
MASCO CORP. $38 (New York symbol MAS; Manufacturing & Industry sector; Shares outstanding: 293.5 million; Market cap: $11.2 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.masco.com) is a leading manufacturer and distributor of home improvement and building products… Read More
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Honeywell International Inc. (New York symbol HON) recently spun off two of its smaller operations—Garrett Motion and Resideo Technologies. Both stocks are down since they become independent firms. Slow starts, however, are… Read More
NUANCE COMMUNICATIONS INC. $17 (Nasdaq symbol NUAN; Manufacturing & Industry sector; Shares outstanding: 285.4 million; Market cap: $4.9 billion; No dividends paid; Takeover Target Rating: Medium; www.nucance.com) specializes in speech and imaging… Read More
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