Spinoffs

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.

See how you can make the most of these special investment opportunities by reading our special free report Spinoff Stock Investigator: All You Need to Know about Reaping the Rewards of Spinoffs.

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Spinoffs Library Archives
GENERAL ELECTRIC $23 (New York symbol GE, Manufacturing & Industry sector; Shares outstanding: 8.7 billion; Market cap: $200.1 billion; Takeover Target Rating: Lowest; Dividend yield: 4.2%; TSINetwork Rating: Above Average; www.ge.com) is a leading maker of industrial machinery, including jet engines, power plant equipment and locomotives....
SINA CORP. $115 (Nasdaq symbol SINA; Consumer sector; Shares outstanding: 71.5 million; Market cap: $8.2 billion; Takeover Target Rating: Lowest; No dividends paid; TSINetwork Rating: Extra Risk; www.sina.com) is one of China’s best-known Internet companies....
PFIZER INC. $36 (New York symbol PFE; Manufacturing & Industry sector; Shares outstanding: 6.0 billion; Market cap: $216.0 billion; Takeover Target Rating: Lowest; Dividend yield: 3.6%; TSINetwork Rating: Above Average; www.pfizer.com) is one of the world’s leading prescription drugmakers.

The company continues to conduct a strategic review of its consumer products division....
On May 31, 2017, Tegna set up its Cars.com subsidiary as a separate firm. Investors received one share in Cars. com for every three Tegna shares they held. They’ll only pay capital gains taxes when they sell those new shares.

The breakup lets each company focus on its main business, which increases its takeover potential....
DOWDUPONT INC. $71 (New York symbol DWDP; Manufacturing sector; Shares outstanding: 2.3 billion; Market cap: $163.3 billion; Takeover Target Rating: Lowest; No dividends paid; TSINetwork Rating: Above Average; www.dow-dupont.com) began trading on September 1, 2017, following the merger of Dow Chemical and DuPont.

The combined company now plans to split into three separate publicly traded firms—Agriculture, Specialty products, and Materials—within 18 months.

Former Dow CEO Andrew Liveris, now the executive chairman of DowDuPont, and former DuPont CEO Ed Breen, now CEO of DowDu- Pont, will lead the process.

A number of activist investors hold interests in the company....
Stock carveouts are also known as split-off IPOs or partial spinoffs. They’re a type of corporate reorganization where a firm uses an initial public offering to sell partial or minority interest in one of its subsidiary. It retains the rest—typically about an 80% stake.

By listing shares in the new company, the parent is able to assess the true market value of its subsidiary....
BAKER HUGHES, a GE co. $34 (New York symbol BHGE; Resources sector; Shares outstanding: 428.0 million; Market cap: $14.6 billion; Takeover Target Rating: Medium; Dividend yield: 2.0%; TSINetwork Rating: Average; www.bhge.com) is now one of the world’s largest oilfield-services firms.

The new c o m p a n y was formed in July 2017 when Baker H u g h e s merged with GE’s oil and gas business.

The deal combined GE’s data analytics and high-tech operations with Baker Hughes’ oilfield expertise....
In 1987, Yum! Brands became the first U.S. fast-food company to enter China. By 2015, that market was supplying half of its overall sales and a third of its earnings.

In November 2016, the company spun off those Chinese operations as Yum China. Now an independent firm, that business will continue to face rising competition in China, but it should more easily respond to changing consumer tastes and other challenges to its market share....
TOROMONT INDUSTRIES LTD. $57.35 (Toronto symbol TIH; TSINetwork Rating: Extra Risk) (416-667-5511; www.toromont.com; Shares outstanding: 78.3 million; Market cap: $4.4 billion; Dividend yield: 1.3%) distributes a broad range of industrial equipment, including machinery made by Caterpillar Inc....
HONEYWELL INTERNATIONAL $138 (New York symbol HON; Manufacturing sector; Shares outstanding: 761.2 million; Market cap: $105.0 billion; Takeover Target Rating: Lowest; Dividend yield: 1.9%; TSINetwork Rating: Average; www.honeywell.com) is a diversified technology firm operating in four main segments: Aerospace (38% of sales); Home and B u i l d i n g (27%); Perf o r m a n c e Ma t e r i a l s (24%); and Safety and Productivity (11%).

Honeywell is now the target of activist investors, including the Third Point LLC hedge fund, led by Dan Loeb....