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
INTEL CORP. $47 is a buy. The company (Nasdaq symbol INTC; Manufacturing & Industry sector; Shares outstanding: 4.1 billion; Market cap: $192.7 billion; Dividend yield: 3.3%; Takeover Target Rating: Medium; www.intel.com) has filed the initial paperwork for an initial public offering of its Mobileye subsidiary later this year....
ENERFLEX LTD. $7.60 is a hold. The company (Toronto symbol EFX; Manufacturing & Industry sector; Shares o/s: 89.7 million; Market cap: $681.7 million; Dividend yield: 1.2%; Takeover Target Rating: Medium; www.enerflex.com) serves natural gas producers by leasing and selling them equipment....
Automotive oil maker Valvoline, itself a spinoff from Ashland Global Holdings, now plans to break up into two separate firms—one focused on quick oil change facilities, and one that sells products through retail stores. Investors should also benefit as Valvoline targets the emerging electric vehicle (EV) market for new growth....
RESIDEO TECHNOLOGIES INC. $27 is a spinoff buy. The company (New York symbol REZI; Manufacturing & Industry sector; Shares o/s: 145.0 million; Market cap: $3.9 billion; No dividends paid; Takeover Target Rating: Medium; www.resideo.com) makes heating, ventilation and air-conditioning equipment....
New spinoffs often struggle for a period, partly because investors tend to dump their new shares. We think that’s why Kyndryl and Viatris are down since they became separate companies. Still, we believe both will eventually move higher, and we see each of them as a hold.


KYNDRYL HOLDINGS INC....
HUNTSMAN CORP. $40 is a buy. The company (New York symbol HUN; Manufacturing & Industry sector; Shares outstanding: 214.4 million; Market cap: $8.6 billion; Dividend yield: 2.2%; Takeover Target Rating: Medium; www.huntsman.com) is a leading producer of specialty chemicals for makers of adhesives, textiles, construction materials, paints, detergents and automotive products.


Hedge fund Starboard Value, which owns an 8.2% stake in Huntsman, now aims to place four of its representatives on the company’s board of directors.


In response, Huntsman now plans to sell its slower-growing textile effects division, which accounts for 6% of its total sales....
Activist investors seek out the same hidden assets we look for, including assets that can be sold or spun off. However, we don’t agree with their assessment of these two targets.


HARLEY-DAVIDSON INC. $39 is a hold. The company (New York symbol HOG; Manufacturing & Industry sector; Shares outstanding: 153.9 million; Market cap: $6.0 billion; Dividend yield: 1.7%; Takeover Target Rating: Medium; www.harley-davidson.com) is an American manufacturer of motorcycles, parts, accessories, and merchandise.


The company has now entered into a co-operation agreement with investment firm H Partners Management, which owns roughly 8% of the shares....
Shares of Chemicals-maker DuPont have moved mostly sideways since the company spun off two of its smaller businesses in 2019. However, DuPont is now shifting its focus to more-profitable fields such as electronics, water, industrial technologies, protection, and next-generation automotive technology....
INTERNATIONAL PAPER CO. $44 is a spinoff buy. The company (New York symbol IP, Manufacturing & Industry sector; Shares outstanding: 376.4 million; Market cap: $16.6 billion; Dividend yield: 4.4%; Takeover Target Rating: Medium; www.internationalpaper.com) is a leading provider of cardboard packaging and related products.


In October 2021, it spun off its printing papers business as a separate company called SYLVAMO CORP....
3M’s shares are down 18% since the start of 2022. The decline is partly due to legal issues involving earplugs that the company manufactured for the U.S. Army. There are now more than 280,000 lawsuits filed against 3M. Of 11 trials to date, juries have sided with the plaintiffs six times, and with 3M five times.


We feel the company will eventually settle these lawsuits....