By Vito J. Racanelli | Barrons’s (The Trader-December 6, 2014)

Spinoffs have been hot in 2014, and the pace of announcements suggest they will continue to be in vogue next year. By December’s end, the number and value of such deals will have risen sharply to an estimated 60 and $154 billion, respectively, from 37 spinoffs worth $86 billion last year, says Joe Cornell, publisher of Spin-Off Research.

Cornell says there are 36 spinoffs already planned that won’t be completed until 2015, which suggests at least roughly the same quantity next year as in 2014. If the broad market does well again next year, the number could climb “north of 60 deals,” he adds. Spinoffs tend to be more common during bull markets.

Typically, companies hive off one or more units—usually those that least fit in with the rest of the company—when the parent’s market value doesn’t appear to fully reflect its various businesses. It’s a tax-efficient way of giving shareholders separate shares of the new company, often a pure play. Post-spinoff, the separate managements are on their own and able to focus closely on the needs of each firm. Studies show that spinoffs often outperform the market over a two-to-three-year period. (In the table, a “carve-out” is a spinoff effected first through an initial public offering.)

This activity has been driven in recent years by intensifying agitation from activist institutional shareholders, a recent example being the decision by eBay (ticker: EBAY) earlier this year to spin out PayPal, after pressure from shareholder Carl Icahn.

Cornell likes Halyard Health (HYH), a small-cap health-care firm spun out from personal-care company Kimberly Clark  (KMB) on Oct. 31. This new stock is under the radar and hasn’t received much Street attention. Eventually it will, and Spin-Off Research values Halyard at 11.3 times fiscal-2015 estimated earnings before interest, taxes, depreciation, and amortization of $261 million, or about $48 per share, 24% upside.

In 2014, the Guggenheim Spin-Off exchange-traded fund (CSD), one of the few ways to play this theme through an ETF, has lagged. That has been due partly to the inclusion of five commodity-related names—out of 33 in the ETF—that have been whacked by lower oil and metals prices. Additionally, some names are small-caps, which have also underperformed. Nevertheless, during a bull market, spinoff returns do outperform the market over time.

For example, the Bloomberg U.S. Spin-off Index, which is market weighted and includes only companies with a total market value of at least $1 billion, is more mechanistic in its stock selection and has done better this year. Cornell adds that the “most bang for your buck” in spinoff returns is over a two-to-three-year time frame.

He also points out, by way of anecdotal data, that the number of annual spinoff deals is approaching the previous high of 66, set in both 1999 and 2000.

That might or might not suggest the broad market is toppy, and we’ll note, too, that spinoffs are best invested through a portfolio approach rather than trying to pick single stock winners.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 View article on Barrons's: Bullish on Spinoffs

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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

 

 

 

For reasons good and bad, companies are dividing in two. Keep your eye on the smaller stock.

Paul J. Lim | Money Magazine | December 11, 2014

If you’re a Hewlett-Packard share­holder, your head may be spinning. In October, CEO Meg Whitmanannounced HP would split off its PC and prin­ter division from its technology services business so each side would gain “independence, focus, financial resources, and flexibility.”

Sounds plausible. Except three years ago she argued against this move—which was recommended by her predecessor Léo Apoth­eker—claiming that it would lead to billions of dollars in wasted costs.

Ignore the Hype, Not the Stock

This kind of CEO flip-flop may turn you off. So might Wall Street’s perpetual cycle of mergers and acquisitions, split-ups, and then new mergers. This year, M&As and spinoffs are both surging.

That said, spinoffs like Hewlett-Packard’s are the one kind of deal with a good record. “While the data is overwhelming that the average acquisition destroys shareholder value, the average spinout tends to work well,” says Christopher Davis, chairman of Davis Advisors.

Focus on What’s Being Spun

Pat Dorsey, founder of Dorsey Asset Management, says, “There comes a point when mature companies take a hard look at themselves and say, ‘We need hair dye.’ ” Often, this means concentrating on the faster-growing division. In HP’s case, that’s the tech services business, which will be dubbed Hewlett-Packard Enterprise. Whitman will be its CEO.

The spun-off hardware division will be called HP Inc.  It offers less earnings growth—but might be the better buy. A 2004 Purdue study of breakups from 1965 to 2000 found that while parent companies don’t meaningfully outperform their peers on average, spinoffs do, especially in the first couple of years. A Bloomberg index of spun-off stocks has outpaced the S&P 500 by five percentage points annually over the past 10 years.

Why? Spun-off companies are usually smaller, and history says there’s a small-stock advantage. Also, if the spinoff is unloved by the parent, it’s likely to be overlooked by fund managers and analysts, especially in the early going, Dorsey says. This creates an opportunity for bargain hunters.

Of course, “not every spin works,” says Joe Cornell, founder of the advisory firm Spin-Off Advisors. (And full disclosure: MONEY is owned by Time Inc., which was split off this year by Time Warner.)

What about Hewlett-Packard Enterprise? Dorsey, for one, can’t imagine it will grow as fast as Whitman hopes. “Servers and consulting—that’s what IBM does,” he says. “Have they looked at how IBM has been doing lately?” That stock is down 14% this year.

View article on Money Magazine: How to Pick the Winner in a Corporate Spinoff

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Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.