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
CONFLUNET INC. makes software that lets businesses access, store, and manage data as continuous, real-time streams. That helps them make critical decisions quicker. The company has over 2,500 clients, including 60 that generate annual revenue in excess of $1 million.


In the three months ended March 31, 2021, Confluent’s revenue shot up 51.3%, to $77.02 million from $50.90 million a year earlier....
PEMBINA PIPELINE CORP., $41 is a buy. The company (Toronto symbol PPL; Utilities sector; Shares outstanding: 550.0 million; Market cap: $22.6 billion; Dividend yield: 6.1%; Takeover Target Rating: Medium; www.pembina.com) has now agreed to acquire Inter Pipeline Ltd....
In May 2013, Alberta’s TransAlta Corp. transferred its renewable power assets into a separate firm called TransAlta Renewables. That let it take advantage of rising investor interest in green energy to sell shares in this new business and unlock value for investors....
L BRANDS INC., $66 is a spinoff buy. The merchant (New York symbol LB; Consumer sector; Shares outstanding: 277.8 million; Market cap: $18.3 billion; Dividend yield: 0.9%; Takeover Target Rating: Medium; www.lb.com) owns two retail chains: Victoria’s Secret stores (which sell lingerie); and Bath & Body Works outlets (personal-care products, including soaps and shampoos).


L Brands has now decided to spin off Victoria’s Secret despite several offers to buy the chain....
Spinoff activity continues to accelerate as the stock market moves on from its COVID-19 shock last year. We continue to see spinoffs as full of opportunity, but for now prefer the three parent firms below to their spinoffs.


MERCK & CO. INC., $77 is a spinoff buy....
DROPBOX INC., $29 is a buy, but only for aggressive investors. The company (Nasdaq symbol DBX; Manufacturing Sector; Shares outstanding: 304.7 million; Market cap: $8.8 billion; No dividends paid; Takeover Target Rating: Medium; www.dropbox.com) provides cloud storage for both individuals and firms....
Most activist investors have a spotty history of actually increasing shareholder value. Still, it’s worthwhile to keep an eye on them as they tend to zero in on companies with under-appreciated assets that can be sold or spun off. That kind of attention jives with our own focus on hidden value....
On January 1, 2018, medical device maker Becton Dickinson acquired rival C.R. Bard (old New York symbol BCR) for $25 billion in cash and shares.


Despite the benefits of this purchase, Becton’s shares have gained just 3% in the past year. That’s because hospitals have deferred many procedures to free up capacity for COVID-19 patients....
OATLY GROUP AB (ADSs), $28 is a hold. This Swedish company (Nasdaq symbol OTLY; Consumer sector; ADSs outstanding: 591.8 million; Market cap: $16.6 billion; No dividend paid; Takeover Target Rating: Lowest; www.oatly.com) is the world’s largest producer of oat milk....
AT&T has decided to reverse two big acquisitions—WarnerMedia and DirecTV—and focus solely on its main wireless and high-speed Internet operations.


The biggest part of this new strategy is the spinoff of WarnerMedia to cable broadcaster Discovery Inc....