Spinoffs outperforming the S&P 500 boost the case for breakups

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The pace of spinoffs in the United States is set to accelerate in 2025, and if history is any guide, the newly created companies are poised to deliver solid returns for investors, according to a report from Trivariate Research LP.

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Shares in companies that are spun off from existing firms tend to outperform the S&P 500 by an average of 10 per cent over the subsequent 18-24 months, data complied by Trivariate show. Meanwhile, the entities that remain after the split perform in line with the S&P 500 over the subsequent year after the spinoff closing date, according to the report published last month.

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There are a few factors expected to add fuel to the trend this year: A string of recent successful spinoffs, rising pressure from activist investors, and expectations that increased mergers and acquisitions activity may require separations to satisfy regulators. FedEx Corp. has already announced plans to spin off its freight division in the next 18 months.

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“The strong performance of spinoff companies can serve as a barometer for management teams who are looking for successful ways to unlock value,” said Adam Parker, founder of Trivariate Research.

There’s ample evidence supporting the merits of the move. The Bloomberg U.S. Spinoff Index, composed of companies that were spun off within the past three years, gained 62 per cent last year. While spinoffs underperform their so-called remain-cos in the first five days post-completion, they outperform them by an average of 12 per cent in the first 400 trading days, the data shows.

There were eight completed spinoffs in the U.S. last year, including the separation of GE Vernova Inc. from General Electric Co., now GE Aerospace. Vernova’s shares have posted a 163 per cent return since the spinoff closing date, while GE Aerospace stock has gained 27 per cent.

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Another example is Atmus Filtration Technologies Inc., which posted a 51 per cent return after its separation from Cummins Inc., whose shares are trading 33 per cent higher after the spinoff’s closing day.

Activist pressure

To Jim Osman, founder and chief executive at special situations research firm the Edge Group PJSC, one of the biggest drivers could be rising pressure coming from activist investors.

“With activist investors stepping up their game, we predict a significant increase in corporate spinoffs in 2025,” Osman wrote in an email. “This trend will not only reshape industries but also create substantial value for proactive investors who know where to look.”

Honeywell International Inc. is a potent example. The industrial conglomerate is exploring a separation of its aerospace business as it faces calls from Elliott Investment Management LP for a breakup.

“Honeywell could boost its enterprise value by up to US$32 billion if it cleaves off its aerospace unit as proposed by activist shareholder Elliott Investment Management,” Bloomberg Intelligence’s Karen Ubelhart wrote.

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The sectors whose companies most often pursue spinoffs are industrials, technology hardware and energy, according to Trivariate. The spinoffs’ subsequent performance also depends on the parent company’s quality, which the researchers define as having strong margins, free cash flow growth, low debt and a low level of short interest.

Interestingly, Trivariate found that the highest-quality remaining companies that engaged in spinoffs were by far the worst performing, lagging the market by 15 per cent on average over the first year.

—With assistance from Yiqin Shen.

Bloomberg.com

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