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

eBay spun off its PayPal transaction-processing business in July 2015. Since then, eBay shares has gained 38%. Over that same time, PayPal has jumped 170%.


Two activist investors have now targeted eBay. They want the company to spin off its classified ad and StubHub ticket re-selling operations....
UBER and LYFT are the two-largest ride-hailing companies in the U.S. Each lets passengers use a smartphone app to hire drivers, who use their own personal vehicles. As well, both are expanding into related fields such as food delivery and self-driving vehicles.


Lyft plans to sell shares to the public in April 2019....

WESTROCK CO. $40 (New York symbol WRK; Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $10.2 billion; Dividend yield: 4.5%; Takeover Target Rating: Medium; www.westrock.com) is a leading provider of packaging materials and systems....
RESMED INC. $117 (New York symbol RMD; Manufacturing & Industry sector; Shares outstanding: 142.7 million; Market cap: $16.7 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.resmed.com) designs, manufactures and distributes CPAP (nasal continuous positive airway pressure) medical devices....
CARS.COM INC. $23 (Nasdaq symbol CARS; Consumer sector; Shares outstanding: 71.9 million; Market cap: $1.7 billion; No dividends paid; Takeover Target Rating: Highest; www.cars.com) is an online marketplace for buyers and sellers of new and used cars.


On May 31, 2017, Tegna Inc....
GENERAL ELECTRIC CO. $8.98 (New York symbol GE, Manufacturing & Industry sector; Shares outstanding: 8.7 billion; Market cap: $78.1 billion; Dividend yield: 0.5%; Takeover Target Rating: Medium; www.ge.com) recently announced a major restructuring that will narrow its focus to three main businesses: aviation operations (jet engines and aircraft electronics); electrical power equipment (such as turbines and related equipment for gas-fired and nuclear power plants); and renewable power equipment (wind farms and hydroelectric plants).


As a result, GE will spin off its healthcare operations as a separate firm....
LUBY’S INC. $1.52 (New York symbol LUB; Consumer sector; Shares outstanding: 29.7 million; Market cap: $45.1 million; No dividends paid; Takeover Target Rating: Highest; www.lubysinc.com) operates 146 restaurants in the U.S., including 84 Luby’s Cafeterias, 60 Fuddruckers, and two Cheeseburger in Paradise locations....

ABB LTD. (ADR) $19 (New York symbol ABB; Manufacturing & Industry sector; ADRs outstanding: 2.1 billion; Market cap: $39.9 billion; Dividend yield: 4.2%; Takeover Target Rating: Low; www.abb.com) makes transformers, transmission systems and circuit breakers for electrical utilities....
BRUNSWICK CORP. $49 (New York symbol BC; Manufacturing & Industry sector; Shares outstanding: 86.7 million; Market cap: $4.2 billion; Dividend yield: 1.7%; Takeover Target Rating: Medium; www.brunswick.com) is a leading maker of leisure and recreational products....
One of the reasons we like spinoffs so much is that academic studies often show that both the parent and the new company created by the spinoff generally do better than comparable firms for at least several years after the split takes place.


For example, a recent study by Mohnish Pabrai (the managing partner of the Pabrai Investment Funds—a family of hedge funds) examined the performance of a portfolio of five spinoff stocks against the S&P 500 Index.


Each spinoff company in the portfolio must be between one and seven years old, and meet other criteria....