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.
Shareholders received one share of Madison Square Garden Entertainment Corp. as a tax-free distribution for each share they held. The remaining firm then became Madison Square Garden Sports Corp.
The Dolan family, through its ownership of Class B shares, retains 70% voting power and control of both companies.
We think the spinoff, which was in the works for the past two years, was a good idea as it will let both businesses focus on their separate strategies....
L BRANDS INC. $11 is a sell. The merchant (New York symbol LB; Consumer sector; Shares outstanding: 276.5 million; Market cap: $3.0 billion; Dividend suspended in March 2020; 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).
The company recently agreed to sell 55% of its struggling Victoria’s Secret chain to private equity firm Sycamore Partners for $525 million....
RESTAURANT BRANDS INTERNATIONAL INC....
We feel this breakup, like most spinoffs, will work out well for investors over time. However, your shares in both new companies will likely move sideways for the next few months, particularly as COVID-19 shutdowns depress demand for aluminum products and industrial parts.
HOWMET AEROSPACE INC....
Those include two new spinoffs—Otis and Carrier—from aerospace giant Raytheon Technologies, which is itself a newly formed company.
The virus, unfortunately, has overshadowed the strong potential of these firms.
While construction activity will likely slow over the next year or two, Otis gets most of its revenue repairing existing elevators and escalators....
Before that key move, United Technologies had already gifted investors with the spinoff of two of its major operations—its Otis (elevator) business, and its Carrier (heating and air conditioning equipment) unit....
Post used the proceeds from the sale to pay down its debt and strengthen value for investors....
VONAGE HOLDINGS CORP....