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.
As we’ve often written, the odds are skewed against you when you enter the market for certain kinds of investments.
One of these is the new-issues, or IPO (Initial Public Offering), market. You can get lucky in the new-issues market, just as you can in the… Read More
PFIZER INC., $37.05, is a buy. Investors in the company (New York symbol PFE; Manufacturing & Industry sector; Shares outstanding: 5.5 billion; Market cap: $203.8 billion; Dividend yield: 3.8%; TSI Takeover Rating: Lowest; www.pfizer.com) will now benefit from the spinoff of its Upjohn business—the firm’s off-patent and generic drug… Read More
Big investors like pension funds tend to prefer pure-play companies with simple-to-understand businesses. As a result, firms with more diverse operations tend to attract activist investors who pressure them to spin off some of their businesses as a way of boosting value for investors.
Emerson Electric… Read More
Activist investing has surged in the past decade, led by a relatively small but powerful group of hedge funds. They follow different activist investing strategies, but all have the same goal: wringing the greatest possible profits from the company’s assets.
This can include forcing a change… Read More
Under pressure from activist investors, these two companies are taking big steps to boost their value for all investors. We feel now is a particularly good time for you to buy.
MARATHON PETROLEUM CORP., $61.80, is a spinoff buy. The stock (New York symbol MPC; Resources sector; Shares… Read More
OCCIDENTAL PETROLEUM CORP., $38.48, is okay for aggressive investors to hold. The company (New York symbol OXY; Resources sector; Shares o/s: 893.3 million; Market cap: $34.4 billion; Divd. yield: 8.3%; Takeover Target Rating: Medium; www.oxy.com) paid $35.7 billion (81% cash, 19% stock) for oil producer Anadarko in August 2019.
Billionaire… Read More
Investors in these two Consumer-sector firms have seen recent share price gains—one is the result of a takeover offer; the other is due to a promising restructuring plan.
These positive developments bode well for your long-term returns, but we suggest you hold off on new buying… Read More
In July 2015, Energizer Holdings split into personal-care products maker Edgewell and battery-manufacturer Energizer—a move that elevated them to pure-play leaders in their markets. It also enhanced investor prospects.
We feel Edgewell’s recent deal to buy online razor company Harry’s will further pay off for investors… Read More
We have often heard from investors who assumed their brokers had their best interests at heart before learning otherwise. Some then shopped around for better stock-trading advice from a new broker. Of course, others chose instead to start investing without one.
Buying and selling online is… Read More
Welcome to your latest issue of Spinoffs, Takeovers and Special Situations! This month, we update spinoff opportunities poised to deliver strong, long-term returns for investors. They include Trisura (left), Edgewell and Marathon Petroleum.
In addition, we provide you with key analysis of stocks now in the crosshairs… Read More
We often remind investors that patience is a key part of the Successful Investor approach to spinoff gains. Many new companies will move sideways for their first few years until they build up a history of revenue and earnings, and attract the attention of brokers.
CARBONITE INC., $16, is okay to hold given the strong possibility of a profitable takeover offer for investors. The company (Nasdaq symbol CARB; Manufacturing & Industry sector; Shares outstanding: 34.7 million; Market cap: $555.2 million; No dividend paid; Takeover Target Rating: Highest; www.carbonite.com) provides computer… Read More
YOUDAO INC. ADRs is the education unit of Chinese videogame maker NetEase (Nasdaq symbol NTES). It provides online courses for pre-school, K-12 and college students in China to over 100 million active users per month. The company also has dictionary, translation and writing tool websites.
Youdao… Read More
CBS CORP. (New York symbols CBS.A $42 [class A: one vote per share] and CBS $38 [class B: non-voting]; Consumer Sector; Shares outstanding: 374.7 million; Market cap: $14.2 billion; Dividend yield: 1.9%; Takeover Target Rating: Lowest; www.cbscorporation.com) has agreed to re-merge with VIACOM INC. (Nasdaq… Read More
Arconic has handed investors a 48% gain since the November 1, 2016, spin-off of its bulk aluminum business (Alcoa Corp). At the time, each investor was gifted with one Alcoa share for every three Arconic shares they owned.
While Alcoa is down 32% since the split,… Read More
When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant shareholders who have limited expectations for it.
Most are willing to sell… Read More
After several years of expanding by acquisition, food maker Post Holdings is going on a diet and stripping down to its core business. As a result, it will spin off its health food unit. That should help the company capitalize on growing consumer interest in… Read More
BLOOMIN’ BRANDS INC., $18, is worth holding given the possibility of a lucrative takeover bid. The company (Nasdaq symbol BLMN; Consumer Sector; Shares outstanding: 91.3 million; Market cap: $1.6 billion; Dividend yield 2.2%; Takeover Target Rating: Highest; www.bloominbrands.com) owns and franchises more than 1,450 restaurants… Read More
This oil industry giant—with refineries, pipelines and gas stations—must soon decide if it will spin off key assets to unlock value for its investors. But even if it decides against a split, Marathon’s earnings are set to keep rising on the strength of its cost-cutting… Read More
LAMB WESTON HOLDINGS INC., $76, is still our #1 spinoff buy for 2019. The company (New York symbol LW; Consumer sector; Shares outstanding: 146.1 million; Market cap: $11.1 billion; Takeover Target Rating: Highest; Dividend yield: 1.1%; www.lambweston.com) is a leading producer of frozen french fries,… Read More
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