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

KAR AUCTION SERVICES INC. $14 is a buy. The company (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 115.8 million; Market cap: $1.6 billion; No dividend paid; Takeover Target Rating: Medium; www.karglobal.com) sells used and salvaged vehicles at physical auction sites in the U.S., Canada, Mexico, Europe, and the U.K.


On June 28, 2019, the company completed its spinoff of IAA Inc....
Pharmaceutical giant Johnson & Johnson still plans to spin off its consumer operations in 2023 as a new firm called Kenvue.


Even though Kenvue’s products are less profitable than prescription drugs and medical devices, it owns some of the world’s best-known brands and generates steady cash flows....
IAC INC. $48 is a buy. The company, formerly called IAC/InterActive Corp., (Nasdaq symbol IAC; Manufacturing & Industry Sector; Shares outstanding: 89.2 million; Market cap: $4.3 billion; No dividend paid; Takeover Target Rating: Lowest; www.iac.com) owns several online businesses, including U.S....

Internet media company IAC (see box) has a long history of spinning off its smaller businesses as they mature. Two of its latest spinoffs—Vimeo and Match Group—are well off their recent peaks during the current market turmoil. We think they’re worth holding, while IAC remains a solid pick for aggressive investors.


VIMEO INC....
CANO HEALTH INC. $4.50 is a hold. The company (New York symbol CANO; Manufacturing sector; Shares outstanding: 485.9 million; Market cap: $2.2 billion; No dividend paid; Takeover Target Rating: Medium; www.canohealth.com) operates 143 medical centres in the U.S....
The broad stock market drop this year has prompted activists to seek out companies perceived as particularly undervalued, such as the two we analyze below. However, their immediate prospects don’t inspire our confidence.


TAKE-TWO INTERACTIVE SOFTWARE INC....
Danaher is a great example of how a company can unlock value for shareholders with spinoffs. Since 2016, the conglomerate has completed two separate spinoffs and recently announced a third.


In fact, the stock has jumped 184% in the past five years, compared to the 44% gain for the S&P 500 Index.


Meantime, Danaher continues to acquire smaller businesses....
XPO LOGISTICS INC. $45 is a spinoff buy. The company (New York symbol XPO; Manufacturing sector; Shares outstanding: 115.0 million; Market cap: $5.2 billion; No dividends paid; Takeover Target Rating: Medium; www.xpo.com) has two businesses: North American LTL offers freight brokerage, last-mile logistics for heavy goods, less-than-truckload (LTL) services and intermodal operations; and Truck Brokerage helps firms place their cargoes with qualified carriers.


The company now plans to spin off the truck brokerage business as a separate firm called RXO Inc....
NCR spun off its data warehousing operations in October 2007 as new firm Teradata. Both stocks slumped shortly after that due to the 2008-2009 financial crisis, but by 2013 each had regained most of its losses. However, Teradata is now down 40% since the split, while its former parent has dropped 55%.


Part of NCR’s decline came when it ended discussions with potential buyer Veritas Capital, a private equity firm....
VOLKSWAGEN AG is a hold. The German automaker (Manufacturing sector; Shares outstanding: 5.0 billion [preferred and common]; Market cap: $177.6 billion; Dividend yield: 3.8%; Takeover Target Rating: Medium; www.volkswagenag.com) has its main listing on the Frankfurt Stock Exchange, but it also trades on the U.S....