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

In January 2022, H&R REIT spun off most of its retail properties to Primaris REIT. Unitholders received one unit of Primaris for every four H&R units they held. At that time, H&R investors held 74% of Primaris, while the Healthcare of Ontario Pension Plan (HOOPP) owned the remaining 26%.


So far, H&R units are down about 8%, while Primaris is up slightly....
KELLOGG COMPANY $67 is a hold. The company (New York symbol K; Consumer sector; Shares outstanding: 342.7 million; Market cap: $23.0 billion; Dividend yield: 3.5%; Takeover Target Rating: Medium; www.kelloggcompany.com) still plans to spin off its North American (U.S., Canadian, and Caribbean) cereal business....
On April 4, 2023, industrial products maker Crane Holdings split into two separate companies—Crane Co. and Crane NXT. Investors received one share of Crane Co. for every share they held. Crane Holdings then changed its name to Crane NXT.


We expect both firms will benefit as they sharpen their focus on their main businesses....
SEMTECH CORP. $22 is a hold. The company (Nasdaq symbol SMTC; Manufacturing & Industry sector; Shares outstanding: 63.9 million; Market cap: $1.4 billion; No dividend paid; Takeover Target Rating: Medium; www.semtech.com) makes chips and electronic devices for a wide variety of uses, such as managing wireless data signals and TV broadcast transmissions.


Semtech recently acquired wireless communications equipment Sierra Wireless Inc....
We keep an eye on activist investors, as they tend to zero in on depressed companies that could unlock value with a spinoff or sale. Here are two firms that are now under activist pressure to sell themselves. While that may attract offers, we see better opportunities for your new buying.


ARCONIC CORP....
Medical giant Johnson & Johnson is now in the process of spinning off its consumer products business. That will let it focus on its more risky, but potentially more profitable, prescription drugs and medical device businesses.


The stock has dropped 2% since the company announced that plan in November 2021....
TECK RESOURCES LTD. $64 is a buy. The company (Toronto symbol TECK.B; Resources sector; Shares outstanding: 514.5 million; Market cap: $33.3 billion; Dividend yield: 0.8%; Takeover Target Rating: Lowest; www.teck.com) still plans to spin off its metallurgical coal operations as Elk Valley Resources Ltd....

Investors tend to embrace spinoffs as they create “pure-play” businesses that are easier to analyze and value.


For example, in the past two years, trucking firm XPO spun off its logistics operations and then its truck brokerage operations....
SOFTBANK GROUP CORP. ADR $18 is a hold. Based in Japan, the company (Over-the-counter Pink Sheets symbol SFTBY; ADRs outstanding: 3.45 billion; Market cap: $62.1 billion; Divd. yield: 0.9%; Takeover Target Rating: Medium; www.softbank.jp) is a conglomerate with holdings in the communications, banking and technology industries.


SoftBank is now preparing to offer the public sell shares in its U.K.-based business Arm Ltd....
MAGNET FORENSICS INC. $44 is a hold. The company (Toronto symbol MAGT; Manufacturing sector; 41.2 million; Market cap: $1.8 billion; No dividend paid; Takeover Target Rating: Highest; www.magnetforensics.com) makes digital investigation software that helps recover evidence from cloud services, mobile phones, computers and other digital devices....