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
These two firms have rebounded strongly from their March 2020 lows, as investors react favourably to their new plans to fuel growth. We like both, and see Veoneer, in particular, as a buy for right now.


TERMINIX GLOBAL HOLDINGS INC. $47 (New York symbol TMX; Manufacturing sector; Shares outstanding: 132.0 million; Market cap: $6.2 billion; No dividends paid; Takeover Target Rating: Medium; www.terminix.com) is a hold....
WALT DISNEY CO. $127 (New York symbol DIS; Consumer sector; Shares outstanding: 1.8 billion; Market cap: $228.6 billion; Takeover Target Rating: Lowest; Dividend suspended in May 2020; www.disney.com) is still a buy.


Due to the COVID-19-related shutdowns of its theme parks and cruise lines, Disney has suspended its semiannual dividend of $0.88 a share....
Activist investment firm Starboard Value LP recently announced that it now holds unspecified stakes in Corteva and ON Semiconductors. The activist feels each of those companies could boost its share price with asset sales and cost costs. Still, we feel Corteva is in a better position to implement these changes than ON Semiconductor.


CORTEVA INC....
KAR Auction Services and its former subsidiary IAA continue to shift their operations online, which should work to limit COVID-19 disruptions. We, therefore, like their long-term outlook. Still, for your new buying, we prefer IAA given the growing number of insurance companies opting to sell damaged cars rather than repair them.


KAR AUCTION SERVICES INC....
Here’s an Excerpt from a recent issue of Advice for Inner Circle Pro Members:


“Market lore can make interesting and worthwhile reading....
IBM has a long history of transforming its business in response to new computing technologies. For instance, as demand for its mainframe computers slowed in the 1990s, the company shifted its focus to services such as designing and maintaining computer systems for its customers....
ANALOG DEVICES INC. $116 is a sell. The analog chipmaker (New York symbol ADI; Manufacturing sector; Shares outstanding: 369.2 million; Market cap: $42.8 billion; Dividend yield: 2.1%; Takeover Target Rating: Medium; www.analog.com) recently agreed to acquire Maxim Integrated Products (Nasdaq symbol MXIM) in an all-stock transaction that will see Maxim shareholders receive 0.630 shares of ADI for every share they hold.


Analog shareholders will own 69% of the combined company, with Maxim shareholders holding the rest....
KONTOOR BRANDS INC. $25 is still a buy for aggressive investors. The stock (New York symbol KTB; Consumer sector; Shares outstanding: 56.9 million; Market cap: $1.4 billion; Dividend suspended; Takeover Target Rating: Medium; www.kontoorbrands.com) gives you a stake in this denim apparel maker and its increasingly popular “heritage” brands....
On November 1, 2015, the old Hewlett-Packard Co. split into two firms—Hewlett-Packard Enterprise and HP Inc. For every share they held in the old HP, shareholders received one share in each of the new companies.


HP Inc., which makes PCs and printers, is now up 59% since the split....
These two firms are planning spinoffs to pay down their high debt. However, their remaining businesses will likely still carry heavy debt loads.


DELL TECHNOLOGIES INC. $67 is a hold. The company (Nasdaq symbol DELL; Manufacturing sector; Shares outstanding: 746.7 million; Market cap: $50.0 billion; No dividend paid; Takeover Target Rating: Low; www.delltechnologies.com) is a leading maker of computers, monitors and related equipment for consumers and businesses.


The company is now considering spinning off its 80.1% stake in VMWARE INC....