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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Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
The company, owned by Arcline Investment Management, makes a variety of electronic and mechanical components, such as connectors, cable assemblies, microwave components, sensors, bearings and seals, for customers in the aerospace, defence and medical technology industries. Its annual revenue is $1.6 billion
Roots first sold sales to the public on October 25, 2017—16.7 million shares at $12.00 each. The shares are now down 67% since the IPO.
A recent example is Medtronic, which recently sold shares in its diabetes products business (called MiniMed).
The plan should help unlock value at Medtronic, which can now focus on its larger businesses. MiniMed should also benefit, but we see better opportunities elsewhere.
The company first sold shares to the public on January 15, 2021, at $22.00 a share. Roark Capital Management owns 61% of the stock.
L3Harris now plans to spin off its Missile Solutions Business through an initial public offering. This business makes rockets and missiles for the U.S. military and its allies. As part of the plan, the U.S. Department of Defense will invest $1 billion into this new firm through a preferred security that it can convert into an undisclosed equity stake. The company expects to complete the IPO later this year.
Investors received one Versigent share for every three Aptiv shares they held. Shareholders will not be liable for capital gains taxes until they sell their new shares.
The breakup should let both companies better focus on growth opportunities. Even so, Aptiv’s remaining businesses are much more profitable than Versigent’s operations, and we prefer Aptiv for your new buying.
On April 1, 2019, DuPont (symbol DD on New York) spun off Dow. As a result, DuPont investors received one Dow share for every three shares they held.