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

As we often remind readers that spinoffs are a great way for companies to unlock value for investors. A recent spinoff, Trane Technologies, has recovered most of its COVID-19-induced losses and is ready to move even higher. Shares of retailer L Brands have also jumped on plans to spin off its Victoria’s Secret’s chain....
GCP APPLIED TECHNOLOGIES INC. $27 is a buy for aggressive investors. The company (New York symbol GCP; Manufacturing sector; Shares outstanding: 73.0 million; Market cap: $2.0 billion; No dividend paid; Takeover Target Rating: Medium; www.gcpat.com) is a leading maker of specialty construction chemicals and building materials....
Some activist investors have a spotty record when it comes to boosting shareholder value. It’s why we independently assess all companies—including those targeted by activists—before recommending them to our readers. In the case of Crown Castle and eBay, we feel the participation of prominent activists will continue to pay off for investors.


CROWN CASTLE INTERNATIONAL CORP....
Here’s an Excerpt from the June 16 issue of Advice for Inner Circle Pro Members:


“The investment business is riddled with conflicts of interest. These conflicts have a way of tainting investment predictions so that they agree with and support sales pitches....
Rent-to-own furniture retailer Aaron’s is now spinning off its faster-growing Progressive financing division. The separation creates two pure-play businesses that will be easier for investors to value, particularly as COVID-19 continues to slow in-store customer traffic.


AARON’S INC....
Multinational chemical maker DowDupont (now DuPont de Nemours) unlocked value for its investors in 2019 with not one but two spinoffs. Each of the new firms is now free to focus on improving its own operations and cutting costs to lift profitability.


Shareholders received one share of the first spinoff, plastics maker Dow Inc., for every three DowDupont shares they held....
TORSTAR CORP. $0.74 is a hold. The company (Toronto symbol TS.B; Consumer sector; Shares outstanding: 81.4 million; Market cap: $60.2 million; Takeover Target Rating: Highest; No dividend paid; www.torstar.com) publishes The Toronto Star, Canada’s largest daily newspaper by circulation....
European industrial conglomerate ABB has opted to sell its struggling power grid business instead of spinning it off. That will nonetheless unlock value and let the company continue to reward investors.


ABB LTD. ADRs $26 is a buy. The company (New York symbol ABB; Manufacturing & Industry sector; ADRs outstanding: 2.1 billion; Market cap: $54.6 billion; Dividend yield: 3.2%; Takeover Target Rating: Medium; www.abb.com) took its present form in 1988 through the merger of Sweden’s Asea AB and Switzerland’s BBC Brown Boveri AG....
THERMO FISHER SCIENTIFIC INC. $411 is a buy. The company (New York symbol TMO; Manufacturing sector; Shares outstanding: 395.0 million; Market cap: $162.3 billion; Takeover Target Rating: Medium; Dividend yield: 0.2%; www.thermofisher.com) is a leading manufacturer of scientific instruments, laboratory equipment, diagnostic consumables, and life science reagents.


The company recently agreed to buy Netherlands-based Qiagen N.V....
COVID-19 has slowed the announcement of new spinoffs That’s because the new firms could have trouble attracting investors during the current stock market volatility. That, in turn, would hurt their stock prices. However, we expect spinoff activity will pick up as the pandemic eases....