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.
GENERAL ELECTRIC CO. $14 (New York symbol GE; Manufacturing & Industry sector; Shares outstanding: 8.7 billion; Market cap: $121.8 billion; Dividend yield: 3.4%; Takeover Target Rating: Lowest; www.ge.com) is a leading… Read More
TENNECO INC. $46 (New York symbol TEN; Manufacturing & Industry sector; Shares outstanding: 51.4 million; Market cap: $2.4 billion; Dividend yield: 2.2%; Takeover Target Rating: Medium; www.tenneco.com) is a leading maker… Read More
5 tips from our TSI Takeover Target Rating system for even better results with spinoff investing
We can say without reservation that spinoff investing is the closest thing you can find to a sure thing. It all comes down to the incentives.
WYNDHAM WORLDWIDE CORP. $115 (New York symbol WYN; Consumer sector; Shares outstanding: 99.9 million; Market cap: $11.5 billion; Dividend yield: 2.3%; Takeover Target Rating: Medium; www.wyndhamworldwide.com) is one of the world’s… Read More
Investors looking for undervalued investments will often keep a sharp look out for the most recent stock spinoffs. That’s because these are typically a great way to pick up good stocks at low prices.
Value investors—and investors following our Successful Investor approach—look for recent stock spinoffs… Read More
When a company spinoff takes place, it’s often because the company’s management sees it as a good time to do so. Spinoffs involve a lot of work and resources and because of this, companies will typically offer a spinoff when conditions are profitable for investors
While… Read More
WestRock Co.— a leading cardboard-packaging maker—recently spun off its specialty chemical operations as Ingevity Corp.
The spinoff created two “pure play” companies that can now focus on expanding their main… Read More
Two Canadian retail chains, Mountain Equipment Co-op and Running Room, will stop selling the products of this outdoors firm due to its involvement in the manufacture of assault weapons such as the one used in the recent Florida high school shootings.
What is a spinoff company and how can it impact the value of your investment portfolio? When a company creates a spinoff, it hands out shares in that company to its shareholders, typically providing substantial benefits in the process.
A spinoff takes place when a company… Read More
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
HILTON WORLDWIDE HOLDINGS $77 (New York symbol HLT; Consumer Sector; Shares outstanding: 321.0 million; Market cap: $24.7 billion; Takeover Target Rating: Low; Dividend yield 0.8%; TSINetwork Rating: Average; www.hiltonworldwide.com)… Read More
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