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

Under pressure from activist investor Elliott Management, Western Digital will now break itself into two separate firms—one will make traditional computer hard drives, and the other will focus on flash memory products. (Manufacturers of mobile phones, digital cameras and other devices use flash chips to retain information without power.)


The company originally acquired flash chipmaker SanDisk in 2016 for $19.0 billion as part of a plan to diversify its operations.


However, integrating this new business was more difficult than it expected....
CORTEVA INC. $47 is a buy. The company (New York symbol CTVA; Manufacturing sector; Shares outstanding: 704.7 million; Market cap: $33.1 billion; Dividend yield: 1.4%; Takeover Target Rating: Medium; www.corteva.com) makes seeds and crop-protection chemicals....
In 2019, the old DowDupont broke itself into three new firms—DuPont, Dow and Corteva (see box). Since then, Corteva is up over 70%, but Dow is down 1% and DuPont has dropped 14%. Even so, we still like the long-term prospects for all three. We see each as a buy.


DUPONT DE NEMOURS INC....

ALLSTATE CORP. $132 is a hold. The company (New York symbol ALL; Finance sector; Shares outstanding: 261.7 million; Market cap: $34.5 billion; Dividend yield: 2.7%; Takeover Target Rating: Medium; www.allstate.com) is a leading provider of property and casualty, and other insurance products in the U.S....
Thanks to acquisitions, these two firms now carry high debt burdens. In response, activists want them to sell assets and pay down debt. We agree with the activists, but these two firms will probably resist their pressure.


GFL ENVIRONMENTAL INC....
On October 16, 2023, the old NCR Corp. (New York symbol NCR) completed its plan to split itself into two separate firms. One (called NCR Atleos) will focus on ATMs, and the other (called NCR Voyix) will focus on digital commerce businesses.


Investors received one share of NCR Atleos for every two NCR shares they hold....
Spinoff spotlight: Warner Bros. Discovery Inc.
WARNER BROS. DISCOVERY INC. $11 is still a hold. The company (Nasdaq symbol WBD; Consumer sector; Shares outstanding: 2.4 billion; Market cap: $26.4 billion; No dividend paid; Takeover Target Rating: Medium; www.wbd.com) took its current form in April 2022 when AT&T merged its WarnerMedia business with Discovery Inc....
As we often point out, new spinoff firms tend to move sideways for the first year or two until they build up a following among brokers and investors.


A good example is Fortive, a 2016 spinoff from Danaher, one of this newsletter’s earliest recommendations....
BIRKENSTOCK HOLDING PLC. $39 is a hold. This U.K.-based company (New York symbol BIRK; Consumer sector; Shares outstanding: 187.8 million; Market cap: $7.3 billion; No dividends paid; Takeover Target Rating: Lowest; www.berkenstock-holding.com) is an iconic footwear maker whose history dates back to 1774.


On October 11, 2023, the company completed a initial public offering of 32.3 million ordinary shares at $46.00 a share....
TRISURA GROUP LTD. $31 remains a buy for aggressive investors. The company (Toronto symbol TSU; Finance Sector; Shares outstanding: 47.4 million; Market cap: $1.5 billion; No dividend paid; Takeover Target Rating: Medium; www.trisura.com) took its current form on June 22, 2017, when Brookfield Asset Management Inc....