Do corporate spinoffs unlock value?

We've recently seen a significant wave of corporate spinoffs, with large companies strategically separating divisions to streamline operations and enhance shareholder value. These spinoffs are typically employed as a proactive response to challenges such as clouded corporate strategy, capital allocation complexities, and means to create shareholder value.

What is a Corporate Spinoff?

The parent company capitalizes a subsidiary as a stand-alone independent business, lists it publicly, and distributes shares to existing shareholders (typically tax-free) in proportion to the amount of stock they hold in the parent. The parent company will retain less than a 20% stake (for tax-free status). The spun-off company retains ownership of its assets, assumes its liabilities, and operates autonomously, allowing for a distinct corporate strategy and focused management.

Why pursue a Spinoff strategy?

• Spinoffs are pursued as a strategy to unlock the true value of a business division that may be undervalued within the larger conglomerate. By creating a separate entity, companies allow investors to assess the division's financials, growth prospects, and risks more accurately. This increased transparency often leads to a more precise valuation, attracting investors who are specifically interested in the industry.
• By separating specific divisions, companies can sharpen their focus, allocate resources more efficiently, and respond swiftly to market changes and customer demands.
• The flurry of activity among major healthcare companies to separate their higher-returning biotech and pharmaceutical businesses from their slower-growing but more predictable consumer healthcare lines can also be pointed to activists demanding change and pressure on boards and company managements that increases with more peer spinoffs announced.

Notable Corporate Spinoff Examples in Healthcare:

• In 2020, General Electric (GE) spun off its Healthcare Technology division, creating a standalone company focused solely on healthcare technology and medical devices.
• In 2021, Johnson & Johnson, a global healthcare conglomerate, announced the spinoff of its Consumer Health division.
• In 2022, GlaxoSmithKline announced the spinoff of its consumer healthcare business (which was originally a joint venture between GSK/Pfizer)
• In 2023, Baxter International announced the restructuring and spinoff planned of its kidney care business
• In 2023, Medtronic announced two spinoffs of its patient monitoring and respiratory intervention businesses, that were initially planned as a sale to private equity groups but discussions have slowed.

As companies navigate challenging times and evolving market dynamics, the strategic utilization of spinoffs will likely continue to shape the corporate landscape, benefiting both companies and their stakeholders. At least 19 spinoffs occurred in 2022 and another 26 are slated for 2023 and early 2024. While spinoff activity is red-hot, for investors, spinoffs should be treated just like any stock and are no predictor of higher returns. 

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