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

LEIDOS HOLDINGS INC. $101 is a buy. The company (New York symbol LDOS; Manufacturing sector; Shares outstanding: 136.5 million; Market cap: $13.8 billion; Dividend yield: 1.4%; Takeover Target Rating: Highest; www.leidos.com) took its current form in August 2016 when Lockheed Martin (New York symbol LMT) separated its Information Systems & Global Solutions (IS&GS) business and then merged it with Leidos.


In 2021, the company paid $375 million in cash for Gibbs & Cox Inc., a Virginia-based full-service engineering and design firm specializing in naval ship design....
DuPont, formerly known as DowDuPont, took its current form on June 1, 2019, when it spun off some of its operations, including its agriculture business, as a separate firm called Corteva Inc. Shareholders received one Corteva share for every three DowDuPont shares they held.


DuPont is down slightly since the split....

3M COMPANY $147 remains a buy. The diversified manufacturer (New York symbol MMM; Manufacturing sector; Shares outstanding: 569.6 million; Market cap: $83.7 billion; Dividend yield: 4.0%; Takeover Target Rating: Medium; www.3m.com) now plans to spin off its Health Care division as a separate company....
Both these spinoffs are off to a slow start as they restructure their operations. We feel their moves will ultimately pay off, but it’s better to hold off new buying right now.


VIATRIS INC. $11 is a hold. The company (New York symbol VTRS; Manufacturing & Industry sector; Shares outstanding: 1.2 billion; Market cap: $13.2 billion; Dividend yield: 4.4%; Takeover Target Rating: Medium; www.viatris.com) makes a variety of branded and generic drugs, include Celebrex (pain relief), Viagra (erectile dysfunction) and Lipitor (cholesterol)....
PINTEREST INC. $22 is a hold. The company (New York symbol PINS; Consumer sector; Shares outstanding: 673.5 million; Market cap: $14.8 billion; No dividend paid; Takeover Target Rating: Medium; www.pinterest.com) operates a social media platform that relies on images to create user interest....
Activist investor Elliott Management is one the world’s largest hedge funds, with $55.7 billion in assets under management as of June 30, 2022. Here’s our take on three of Elliott’s recent investments.


PAYPAL HOLDINGS INC. $99 is a buy for aggressive investors. The company (Nasdaq symbol PYPL; Finance sector; Shares outstanding: 1.2 billion; Market cap: $118.8 billion; No dividends paid; Takeover Target Rating: Medium; www.paypal.com) processes online transactions on millions of websites, including purchases made on eBay, its former parent company.


The company recently announced a new agreement with activist investment firm Elliott Investment Management, which owns $2 billion of the company’s stock.


The activist will support PayPal’s current restructuring plan, which involves focusing on building transaction volumes to generate higher profits, rather than focusing on adding new users....
In 2021, due to activist investor pressure from Jana Partners, Labcorp carried out a strategic review. That failed to result in a sale of the company. Instead, Labcorp initiated a quarterly dividend and a $2.5-billion share repurchase program.


To further boost shareholder value, Labcorp is now spinning off its faster-growing clinical development business....
GENERAL ELECTRIC CO. $80 remains a hold. The conglomerate (New York symbol GE; Manufacturing sector; Shares outstanding: 1.1 billion; Market cap: $88.0 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.ge.com) plans to break itself up into three separate companies.


In early 2023, GE will hand out shares in its GE HealthCare business (it makes X-ray equipment, MRI and ultrasound scanners) as tax-deferred dividends....
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 6%, but Lamb Weston has soared 140%.


Both stocks took a step back as a result of COVID-19 lockdowns, but they are now close to their pre-pandemic levels....
WESTROCK CO., $39.39, symbol WRK on New York, is a leading provider of packaging materials and systems. It operates through 320 locations spread across North America, South America, Europe and Asia.

The company took its current form on July 1, 2015, when it merged with two other firms: Rock-Tenn Company and Mead-Westvaco Corporation....