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.
CONFLUNET INC. makes software that lets businesses access, store, and manage data as continuous, real-time streams. That helps them make critical decisions quicker. The company has over 2,500 clients, including 60 that generate annual revenue in excess of $1 million.
In the three months ended March… Read More
PEMBINA PIPELINE CORP., $41 is a buy. The company (Toronto symbol PPL; Utilities sector; Shares outstanding: 550.0 million; Market cap: $22.6 billion; Dividend yield: 6.1%; Takeover Target Rating: Medium; www.pembina.com) has now agreed to acquire Inter Pipeline Ltd. (Toronto symbol IPL). Pembina is offering 0.5… Read More
In May 2013, Alberta’s TransAlta Corp. transferred its renewable power assets into a separate firm called TransAlta Renewables. That let it take advantage of rising investor interest in green energy to sell shares in this new business and unlock value for investors. It also raised… Read More
L BRANDS INC., $66 is a spinoff buy. The merchant (New York symbol LB; Consumer sector; Shares outstanding: 277.8 million; Market cap: $18.3 billion; Dividend yield: 0.9%; Takeover Target Rating: Medium; www.lb.com) owns two retail chains: Victoria’s Secret stores (which sell lingerie); and Bath &… Read More
Spinoff activity continues to accelerate as the stock market moves on from its COVID-19 shock last year. We continue to see spinoffs as full of opportunity, but for now prefer the three parent firms below to their spinoffs.
MERCK & CO. INC., $77 is a spinoff… Read More
DROPBOX INC., $29 is a buy, but only for aggressive investors. The company (Nasdaq symbol DBX; Manufacturing Sector; Shares outstanding: 304.7 million; Market cap: $8.8 billion; No dividends paid; Takeover Target Rating: Medium; www.dropbox.com) provides cloud storage for both individuals and firms. It has over… Read More
Most activist investors have a spotty history of actually increasing shareholder value. Still, it’s worthwhile to keep an eye on them as they tend to zero in on companies with under-appreciated assets that can be sold or spun off. That kind of attention jives with… Read More
On January 1, 2018, medical device maker Becton Dickinson acquired rival C.R. Bard (old New York symbol BCR) for $25 billion in cash and shares.
Despite the benefits of this purchase, Becton’s shares have gained just 3% in the past year. That’s because hospitals have deferred… Read More
OATLY GROUP AB (ADSs), $28 is a hold. This Swedish company (Nasdaq symbol OTLY; Consumer sector; ADSs outstanding: 591.8 million; Market cap: $16.6 billion; No dividend paid; Takeover Target Rating: Lowest; www.oatly.com) is the world’s largest producer of oat milk. It also produces frozen desserts… Read More
AT&T has decided to reverse two big acquisitions—WarnerMedia and DirecTV—and focus solely on its main wireless and high-speed Internet operations.
The biggest part of this new strategy is the spinoff of WarnerMedia to cable broadcaster Discovery Inc. The merger better positions the new firm to expand… Read More
RESIDEO TECHNOLOGIES INC. $28 is a buy. The company (New York symbol REZI; Manufacturing & Industry sector; Shares outstanding: 143.9 million; Market cap: $4.0 billion; No dividends paid; Takeover Target Rating: Medium; www.resideo.com) makes heating, ventilation and air-conditioning equipment. It also distributes fire-protection and building… Read More
VF CORP. $85 is a buy. The stock (New York symbol VF; Consumer sector; Shares outstanding: 391.8 million; Market cap: $33.3 billion; Dividend yield: 2.3%; Takeover Target Rating: Medium; www.vfc.com) lets you tap one of the world’s largest apparel suppliers and a leader in the… Read More
Since their breakup in June 2018, Autoliv is down 2% while its former subsidiary Veoneer has dropped 45%. Those declines are largely because the COVID-19 pandemic hurt car sales and hurt demand for their products. However, both have moved up since the start of 2021… Read More
HONEST CO. INC. $16 is a hold. The company (Nasdaq symbol HNST; Consumer sector; Shares outstanding: 90.2 million; Market cap: $1.4 billion; No dividend paid; Takeover Target Rating: Lowest; www.honest.com) sells a variety of baby products, bath items and skin lotions made from natural ingredients… Read More
IPOs generally come to market when it’s a good time for insiders to sell. That often isn’t a good time for you to buy. In addition, as part of our three-part approach to investing, we downplay stocks in the broker/media limelight, such as the three… Read More
PRUDENTIAL PLC $42 is a hold. The company (New York symbol PUK; Finance sector; ADRs outstanding: 1.3 billion; Market cap: $54.6 billion; Dividend yield: 1.0%; Takeover Target Rating: Medium; www.prudentialplc.com) is U.K.-based provider of insurance and other financial services. It is not related to the… Read More
One of the world’s most prominent activist investors, Carl Icahn has a long history of successfully targeting troubled companies that are ripe for a quick turnaround. Even so, we advise investors to avoid these two firms that are now in his crosshairs.
FIRSTENERGY CORP. $37 is… Read More
On April 1, 2020, the old Arconic Inc. split into two new companies: Howmet and Arconic Corp. As a result, each Arconic Inc. share automatically converted to one share of Howmet; investors also received one share of Arconic Corp. for every four shares of Arconic… Read More
AT&T INC. $30 is a buy. The company (New York symbol T; Utilities sector; Shares outstanding: 7.1 billion; Market cap: $213.0 billion; Dividend yield: 6.9%; Takeover Target Rating: Medium; www.att.com) is now merging its WarnerMedia business with Discovery Inc. (Nasdaq symbol DISCA). The new firm… Read More
Holding companies often own a variety of unrelated businesses. As a result the shares of those complex companies tend to trade for less than the value of their assets.
One of the best ways to reduce or eliminate this “holding company discount” is for the firm… Read More
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