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
On July 1, 2015, due to pressure from billionaire activist investor Carl Icahn, online auction firm eBay split off its electronic-payment business, PayPal, as a separate firm. Investors received one PayPal share for each eBay share they held.


Both stocks jumped during the pandemic as consumers embraced online shopping, but have moved down as stores re-opened....

VICTORIA’S SECRET & CO. $17 is a hold. The company (New York symbol VSCO; Consumer sector; Shares outstanding: 77.3 million; Market cap: $1.3 billion; No dividend paid; Takeover Target Rating: Medium; www.victoriassecretandco.com) took its current form in August 2021 when the old L Brands (New York symbol LB) became two separate firms: Victoria’s Secret (lingerie) and Bath & Body Works (personal care products)....

In the past few years, big pharmaceutical companies have spun off their consumer drug operations. That’s part of their strategy to focus on more-profitable prescription drug businesses. These two recent spinoffs have decent long-term prospects, but their shares will likely remain depressed until they cut their high debt loads.


VIATRIS INC....
AVANTAX INC. $26 is a hold. The company (Nasdaq symbol AVTA; Finance Sector; Shares outstanding: 36.8 million; Market cap: $956.8 million; No dividend paid; Takeover Target Rating: Highest; www.avantax.com) offers wealth management, insurance and tax planning services through roughly 3,100 advisors....
Activist investors often push companies to put themselves up for sale. Sometimes that works, such as the 30% premium that Avantax (see box) recently secured. In other cases, like Bloomin’ Brands and Hanesbrands, a takeover may never materialize.


BLOOMIN’ BRANDS INC....
Conagra spun off its potato-processing business Lamb Weston in November 2016; investors received one Lamb Weston share for every three Conagra shares they held. Since the split, Conagra is down roughly 20%, but Lamb Weston has soared 225%.


We still like the outlook for both stocks....
FORTREA HOLDINGS INC. $29 is still a spinoff buy. The company (Nasdaq symbol FTRE; Manufacturing sector; Shares outstanding: 88.8 million; Market cap: $2.6 billion; No dividend paid; Takeover Target Rating: Medium; www.fortrea.com) is a contract research organization (CRO) that provides clinical drug trial management to pharmaceutical and biotechnology companies.


On June 30, 2023, Laboratory Corp....
Over the span of 100 years, General Electric became one of the world’s largest conglomerates through a series of acquisitions, including many that were outside its main electrical products businesses such as insurance and broadcast TV networks.


After the 2008 financial crisis, GE decided to unwind its financial services businesses....
ODDITY TECH LTD. $44 is a hold. Based in Israel, this company (Nasdaq symbol ODD; Consumer sector; Shares outstanding: 56.5 million; Market cap: $2.5 billion; No dividend paid; Takeover Target Rating: Lowest; www.oddity.com) makes cosmetics (under the IL Makiage brand) and skin and hair products (under the SpoiledChild brand)....

NCR CORP. $29 is a buy for aggressive investors. The company (New York symbol NCR; Manufacturing & Industry sector; Shares outstanding: 140.9 million; Market cap: $4.1 billion; No dividend paid; Takeover Target Rating: Medium; www.ncr.com) plans to split into two separate firms by the end of 2023....