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
SONY CORP. ADRs $59 (New York symbol SNE; Manufacturing & Industry sector; ADRs outstanding: 1.3 billion; Market cap: $76.7 billion; Dividend yield: 0.5%; Takeover Target Rating: Lowest; www.sony.net) has rejected demands from activist investor Daniel Loeb, who owns roughly 2% of the company’s shares through his Third Point hedge fund, to spin off its image sensor division....
MADISON SQUARE GARDEN CO. $268 (New York symbol MSG; Shares outstanding: 23.8 million; Market cap: $6.4 billion; No dividend paid; Takeover Target Rating: Lowest; www.msg.com) is a sports and entertainment company that owns the New York Rangers hockey team, the NBA’s New York Knicks and several other sports franchises....
Stock carveouts can be thought of as split-off IPOs or partial spinoffs. They’re a type of reorganization where a firm sets up one of its businesses as a separate company and uses an initial public offering to sell partial or minority interest in the new firm. The parent typically retains an 80% stake.


Listing shares in the new company lets the parent assess the true market value of the independent new business....
SERVICEMASTER GLOBAL HOLDINGS INC. $56 (New York symbol SERV; Manufacturing sector; Shares outstanding: 135.9 million; Market cap: $7.6 billion; No dividends paid; Takeover Target Rating: Medium; www.servicemaster.com) has two main businesses.


Terminix (contributing 87% of its 2018 revenue, 79% of its earnings) sells termite and pest control services to 2.7 million customers in the U.S., Canada, Mexico and the Caribbean; and ServiceMaster Brands (13%, 21%) sells a variety of services to homeowners, such as cleaning, cabinet and wood furniture repair, home inspection and disaster restoration....
TEGNA INC. $15 (New York symbol TGNA; Consumer sector; Shares outstanding: 215.8 million; Market cap: $3.2 billion; Dividend yield: 1.8%; Takeover Target Rating: Medium; www.tegna.com) owns 49 TV and two radio stations in 41 markets....
BOX INC. $17 (New York symbol BOX; Manufacturing & Industry sector; Shares outstanding: 147.8 million; Market cap: $2.5 billion; No dividend paid; Takeover Target Rating: Medium; www.box.com) sells cloud-based storage services to over 95,000 businesses....
ECHOSTAR CORP. $40 (Nasdaq symbol SATS; Manufacturing & Industry Sector; Shares outstanding: 97.4 million; Market cap: $4.0 billion; No dividend paid; Takeover Target Rating: Lowest; www.echostar.com) sells satellite-based high-speed Internet access through its Hughes business to over 1.5 million consumers and businesses in the U.S....
GANNETT CO. INC. $10.56 (New York symbol GCI; Consumer sector; Shares outstanding: 114.6 million; Market cap: $1.2 billion; Dividend yield: 6.0%; Takeover Target Rating: Highest; www.gannett.com) publishes its flagship newspaper, USAToday, along with smaller dailies, in over 100 U.S....
IAC/InterActive Corp. began its operations in the late 1980s as the owner of the cable channel Home Shopping Network and several TV stations focused on local markets.


Media mogul Barry Diller moved that focus away from TV to the Internet in the 1990s after acquiring control of the company....
MCAFEE LLC makes cybersecurity software that protects mobile devices and the cloud-based networks from online intruders. In 2016, Intel Corp. (Nasdaq symbol INTC) sold 51% of McAfee to private equity firm TPG Capital. Private equity firm Thoma Bravo later acquired a minority stake.


Those investors now plan to take McAfee public though an initial public offering, which would likely value the company at $8 billion.


McAfee’s owners aim to take advantage of strong investor interest in cybersecurity stocks....