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
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....
VALVOLINE INC. $28 is a buy. The company (New York symbol VVV; Manufacturing sector; Shares outstanding: 177.0 million; Market cap: $5.0 billion; Dividend yield: 1.8%; Takeover Target Rating: Medium; www.valvoline.com) is a leading provider of automotive services and a marketer and supplier of premium branded lubricants.


In September 2016, Ashland Global Holdings Inc....

Medical device maker Becton Dickinson completed the spinoff of its diabetes-products business (embecta) in April 2022. Investors received one share of embecta for every five common shares of Becton they held.


So far, the new firm is down 16%, while the former parent in down 10%....

KYNDRYL HOLDINGS INC. $10 is a hold. The company (New York symbol KD; Manufacturing & Industry sector; Shares outstanding: 226.8 million; Market cap: $2.3 billion; No dividends paid; Takeover Target Rating: Medium; www.kyndryl.com) took its current form on November 3, 2021, when International Business Machines Corp....
These two overseas firms are spinning off some of their smaller businesses, which helps unlock value. For your new buying, we still like their shares, but we suggest holding off for now on buying additional shares in their spinoffs.


ABB LTD. ADRs $27 is a buy. This Swiss-based company (New York symbol ABB; Manufacturing & Industry sector; ADRs outstanding: 2.1 billion; Market cap: $56.7 billion; Dividend yield: 3.3%; Takeover Target Rating: Medium; www.abb.com) is a leading maker of electrical transformers, transmission systems and circuit breakers for electrical utilities....

CARDINAL HEALTH INC. $68 is a hold. The company (New York symbol CAH; Manufacturing sector; Shares outstanding: 272.5 million; Market cap: $18.5 billion; Dividend yield: 3.0%; Takeover Target Rating: Medium; www.cardinalhealth.com) distributes branded and generic drugs to pharmacies, hospitals and clinics in the U.S....

Media companies have struggled recently as advertisers shift their spending to online platforms. Rising inflation and interest rates are also hurting the subscription revenues of streaming services. As a result, activist investors are now demanding changes, including at these two media giants.


WALT DISNEY CO....
Swiss pharmaceutical giant Novartis spun off its eye-care business as Alcon in April 2019. Novartis shareholders received 1 Alcon share for every 5 Novartis shares they held.


As a separately traded stock, Alcon is now up 23%. It should continue to move higher as aging baby boomers need more of the company’s contact lenses and cataract surgery products....