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.
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The spinoff will let Glaxo better focus on its main prescription drug and vaccine operations....
JOHNSON & JOHNSON $176 is a spinoff buy. The company (New York symbol JNJ; Consumer sector; Shares outstanding: 2.6 billion; Market cap: $457.6 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; www.jnj.com) operates through three major businesses: Pharmaceutical (55% of 2021 revenue) makes anti-infective, antipsychotic, contraceptive, dermatological, and gastrointestinal medicines; Medical Devices (29%) sells a range of orthopedic, surgical, cardiovascular, sterilization, diabetic, and vision-care devices; and Consumer Health (16%) makes over-the-counter products such as Johnson’s baby-care items, Band-Aid bandages, Tylenol and Motrin painkillers, Listerine mouthwash, and Neutrogena skin cream.
The company still plans to spin off its Consumer Health business as a separate firm in 2023.
Meantime, in the quarter ended April 3, 2022, Johnson & Johnson’s sales rose 5.0%, to $23.43 billion from $22.32 billion a year earlier....
Activist investor Elliott Management (which owns about $1 billion worth of Western Digital shares) now wants the company to spin off its NAND flash memory operations as a separate company....
HASBRO INC....
Medical device maker Enovis (formerly called Colfax) recently spun off its non-medical businesses as a separate firm called ESAB.
We feel the split makes a lot of sense, as there was little overlap between the two businesses. Focusing on their separate markets should spur both “pure-play” stocks higher over the next few years.
ENOVIS CORP....
The company plans to spin off its asset management business into a separate, publicly listed company....
We still like the long-term outlook for both stocks even as new lockdowns in China hurt Yum China’s current sales and earnings.
The truth is pandemic lockdowns encouraged both companies to accelerate the adoption of digital ordering and delivery services....