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.
On June 22, 2017, Brookfield Asset Management Inc. (Toronto symbol BAM.A) spun off its specialty insurance business as a separate company called Trisura. Investors received one Trisura share for every 170 Brookfield shares they held.
The new firm gets little media/broker attention, even though the stock has soared over 500% since the spinoff....
Worthington now plans to spin off its steel-processing business from its three other segments....
These spinoffs have surged since becoming independent firms. Their recent acquisitions also position them for more gains as the economy continues to recover.
CARRIER GLOBAL CORP. $44 is a buy. This company (New York symbol CARR; Manufacturing & Industry sector; Shares outstanding: 836.3 million; Market cap: $36.8 billion; Dividend yield 1.4%; Takeover Target Rating: Medium; www.carrier.com) is a leading maker of heating, ventilation and air conditioning (HVAC) equipment.
In April 2020, Raytheon Technologies Corp....
SALESFORCE INC. $155 is a hold. The company (New York symbol CRM; Manufacturing sector; Shares outstanding: 999.0 million; Market cap: $154.8 billion; No dividend paid; Takeover Target Rating: Medium; www.salesforce.com) is a leading provider of on-demand customer relationship management (CRM) services....
COLGATE-PALMOLIVE CO. $76 is a buy. The company (New York symbol CL; Consumer sector; Shares outstanding: 835.2 million; Market cap: $63.5 billion; Dividend yield 2.5%; Takeover Target Rating: Medium; www.colgatepalmolive.com) makes a wide variety of health, beauty and household products, including Ajax, Fab, Murphy and Palmolive cleansers; Colgate toothpaste; Irish Spring, Palmolive, Sanex, Softsoap soaps; Mennen shave cream; and Hill’s pet food brands Science Diet and Prescription Diet.
Activist investor Dan Loeb’s Third Point LLC has now taken a nearly $1 billion stake in Colgate-Palmolive.
He wants the company to spin off its Pet Nutrition business....
We feel these moves improve 3M’s long-term prospects....
Since the Organon spinoff, its former parent has gained 32%, which is far better than the 6% decline for the S&P 500 Index over that same period....
Intel now plans to sell 41 million shares in Mobileye to the public for $18 to $20 each....