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
SANDRIDGE ENERGY INC. $17 (New York symbol SD; Resources sector; Shares outstanding: 34.5 million; Market cap: $586.5 million; No dividends paid; Takeover Target Rating: Highest; www.sandridgeenergy.com) is an oil and gas exploration and production company with properties in both Colorado and Oklahoma.


Under a new deal with billionaire activist investor Carl Icahn, who owns 13.6% of the company, SandRidge has agreed to expand the board of directors from seven to eight....
USG CORP. $43 (New York symbol USG; Manufacturing & Industry sector; Shares o/s: 139.7 million; Market cap: $6.0 billion; No dividend paid; Takeover Target Rating: Highest; www.usg.com) makes gypsum wallboard (drywall), wallboard finishing materials, tile backers and underlayment, and ceiling tiles.


Germany’s Knauf Group holds a 10.5% stake in USG and is its second-largest shareholder....
SERVICEMASTER GLOBAL HOLDINGS INC. $57 (New York symbol SERV; Manufacturing sector; Shares outstanding: 135.4 million; Market cap: $7.7 billion; Takeover Target Rating: Medium; No dividends paid; www.servicemaster.com) has three divisions: Terminix (53% of its 2017 revenue, 49% of its earnings) sells termite and pest control services to 2.7 million customers in the U.S., Canada, Mexico and the Caribbean; American Home Shield (40%, 38%) sells home service plans that cover the repair costs of major appliances and major systems such as heating and cooling; and Franchise Services (7%, 13%) sells a variety of services to homeowners, such as cleaning, cabinet and wood furniture repair, home inspection and disaster restoration....
MADISON SQUARE GARDEN CO. $323 (New York symbol MSG; Consumer sector; Shares outstanding: 19.1 million; Market cap: $6.2 billion; Takeover Target Rating: Medium; No dividends paid; www.msg.com) is a sports and entertainment company that owns the New York Rangers hockey team, the New York Knicks basketball team and other sports franchises....
Automatic Data Processing (ADP) spun off its brokerage-services business in April 2007 as Broadridge Financial (New York symbol BR). The new stock went sideways for a few years, but has now more than tripled since the spinoff.


On September 30, 2014, ADP completed another spinoff: its car-dealer software business (CDK Global)....
GREENSKY INC. $24 (Nasdaq symbol GSKY; Manufacturing sector; Shares outstanding: 180.8 million; Market cap: $4.3 billion; No dividends paid; Takeover Target Rating: Medium; www.greensky.com) makes software that helps banks and merchants simplify and speed up the approval of consumer loans....
FORTIVE CORP. $78 (New York symbol FTV; Manufacturing sector; Shares outstanding: 348.6 million; Market cap: $27.2 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.fortive.com) took its current form in July 2016 when Danaher Corp....
GENERAL ELECTRIC CO. $14 (New York symbol GE; Manufacturing & Industry sector; Shares outstanding: 8.7 billion; Market cap: $121.8 billion; Dividend yield: 3.4%; Takeover Target Rating: Lowest; www.ge.com) is a leading maker of industrial machinery, including jet engines; power plant equipment; and locomotives....
CONVERGYS CORP. $24 (New York symbol CVG; Manufacturing & Industry sector; Shares outstanding: 91.5 million; Market cap: $2.2 billion; Dividend yield: 1.8%; Takeover Target Rating: Highest; www.convergys.com) operates 136 call centres for clients in 33 countries....
FIAT CHRYSLER AUTOMOBILES N.V. $21 (New York symbol FCAU; Manufacturing sector; Shares o/s: 1.7 billion; Market cap: $35.7 billion; No dividend paid; Takeover Target Rating: Lowest; www.fcagroup.com) plans to focus on its four core brands: Jeep SUVs, Ram pickups, and Alfa Romeo and Maserati luxury cars....