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

Fortune Brands Home & Security (now called Fortune Brands Innovation) became an independent company following its spin-off from the former Fortune Brands holding company in 2011.


In December 2022, the company completed its own spinoff of its home cabinet business (MasterBrand)....
EMBECTA CORP. $19 is a spinoff buy. The company (Nasdaq symbol EMBC; Manufacturing & Industry sector; Shares outstanding: 57.3 million; Market cap: $1.1 billion; Dividend yield: 3.2%; Takeover Target Rating: Medium; www.embecta.com) took its current form in April 2022 when Becton Dickinson & Co....
These three medical-related stocks are down or flat since they either announced a spinoff (Baxter) or became separate firms (Bausch + Lomb, and embecta—see box). We like all of them, but see only two as buys right now.


BAXTER INTERNATIONAL INC....
CATALENT INC. $45 is a hold. The company (New York symbol CTLT; Manufacturing sector; Shares outstanding: 180.3 million; Market cap: $8.1 billion; No dividend paid; Takeover Target Rating: Medium; www.catalent.com) is a contract drugmaker that makes products for larger pharmaceutical companies including Novo Nordisk.


Due to several quality-control problems at some of its plants and lower demand from COVID-19-related vaccines and treatments, the stock has dropped 55% in the past year.


That decline has prompted activist investor Elliott Investment to acquire an undisclosed stake in Catalent....

Prominent activists are helping both these firms transition and adapt to new strategies. The small size of each company could also make it an attractive takeover target. Even so, we feel their risks outweigh the possible rewards.


SPLUNK INC....
On November 3, 2021, IBM spun off Kyndryl—the new name for its business that helps corporate and government clients manage their datacentres. Investors received one Kyndryl share for every five IBM shares they held.


Since the split, IBM has gained 15%....
3M COMPANY $101 is a buy for long-term gains. The company (New York symbol MMM; Manufacturing & Industry sector; Shares o/s: 552.0 million; Market cap: $55.8 billion; Divd. yield: 5.9%; Takeover Target Rating: Medium; www.3m.com) plans to spin off its Health Care division as a separate firm at some point between late 2023 and early 2024....
Pipeline giant TC Energy (formerly called TransCanada Pipelines) recently announced a new plan to unlock value for its investors. The strategy includes spinning off the company’s oil pipelines business and selling some of its other assets to pay down debt.


The stock dropped on the announcement....
FAT BRANDS INC. $7.14 is a hold. The company (Nasdaq symbol FAT; Consumer sector; Shares outstanding: 16.7 million; Market cap: $119.2 million; Dividend yield: 8.3%; Takeover Target Rating: Medium; www.fatbrands.com) is a leading multi-brand restaurant franchising company....

BROADCOM INC. $901 is a buy for aggressive investors. The company (Nasdaq symbol AVGO; Manufacturing sector; Shares outstanding: 412.7 million; Market cap: $371.8 billion; Dividend yield: 2.0%; Takeover Target Rating: Medium; www.broadcom.com) designs, develops and sells semiconductors (computer chips) and infrastructure software....