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.
CARBONITE INC., $16, is okay to hold given the strong possibility of a profitable takeover offer for investors. The company (Nasdaq symbol CARB; Manufacturing & Industry sector; Shares outstanding: 34.7 million; Market cap: $555.2 million; No dividend paid; Takeover Target Rating: Highest; www.carbonite.com) provides computer cloud backup and restore solutions....
YOUDAO INC. ADRs is the education unit of Chinese videogame maker NetEase (Nasdaq symbol NTES). It provides online courses for pre-school, K-12 and college students in China to over 100 million active users per month. The company also has dictionary, translation and writing tool websites.
Youdao lets users access its services for free, so it gets most of its revenue from selling online advertising....
CBS CORP. (New York symbols CBS.A $42 [class A: one vote per share] and CBS $38 [class B: non-voting]; Consumer Sector; Shares outstanding: 374.7 million; Market cap: $14.2 billion; Dividend yield: 1.9%; Takeover Target Rating: Lowest; www.cbscorporation.com) has agreed to re-merge with VIACOM INC. (Nasdaq symbols VIA $26 [class A: one vote per share] and VIAB $23 [class B: non-voting]; Consumer Sector; Shares outstanding: 403.4 million; Market cap: $9.3 billion; Dividend yield: 3.5%; Takeover Target Rating: Lowest; www.viacom.com).
Broadcaster CBS originally spun off Viacom, its movie studio business, on January 1, 2006....
Arconic has handed investors a 48% gain since the November 1, 2016, spin-off of its bulk aluminum business (Alcoa Corp). At the time, each investor was gifted with one Alcoa share for every three Arconic shares they owned.
While Alcoa is down 32% since the split, both firms continue to cut costs and focus on their growth....
When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant shareholders who have limited expectations for it.
Most are willing to sell their shares when they get around to it....
After several years of expanding by acquisition, food maker Post Holdings is going on a diet and stripping down to its core business. As a result, it will spin off its health food unit. That should help the company capitalize on growing consumer interest in healthy eating....
BLOOMIN’ BRANDS INC., $18, is worth holding given the possibility of a lucrative takeover bid. The company (Nasdaq symbol BLMN; Consumer Sector; Shares outstanding: 91.3 million; Market cap: $1.6 billion; Dividend yield 2.2%; Takeover Target Rating: Highest; www.bloominbrands.com) owns and franchises more than 1,450 restaurants in 48 states and 19 countries....
This oil industry giant—with refineries, pipelines and gas stations—must soon decide if it will spin off key assets to unlock value for its investors. But even if it decides against a split, Marathon’s earnings are set to keep rising on the strength of its cost-cutting plan....
In November 2016, Conagra Brands (New York symbol CAG) spun off Lamb Weston as a separate firm....