The concept of corporate spin-offs has gained significant traction in recent years, particularly within the U.SmarketAccording to a report by Trivariate Research, there is an anticipated surge in spin-off activities among American companies before the year 2025. Historically, spin-offs have proven to be lucrative opportunities for investors, with data suggesting that stocks from newly formed companies typically outperform the S&P 500 index by an average of 10% in the subsequent 18 to 24 monthsMeanwhile, the entities left behind after spin-offs tend to align with the performance of the S&P 500 in the year following the split.

This rising trend, as projected for this year, is being influenced by several factorsThe successful spin-offs witnessed recently, increasing pressure from activist investors, and a wave of mergers and acquisitions that may necessitate spin-offs to meet regulatory expectations are all playing a pivotal role

Advertisements

For instance, FedEx has already announced plans to divest its freight division within the next 18 months, signaling a future where corporate restructurings could become more commonplace.

Adam Parker, the founder of Trivariate Research, opines, “The robust performance of spun-off companies can serve as a barometer for management teams looking to unlock value.” There is substantial empirical support for the benefits associated with spin-offsThe Bloomberg U.SSpin-Off Index, which comprises companies that underwent spin-offs in the past three years, surged by 62% last yearNoteworthy is that even though spun-off entities may struggle initially, their performance improves markedly over time; on average, they outperform remaining companies by 12% over the first 400 days after the split.

Last year alone, eight spin-offs were completed in the U.S., including the notable separation of GE Vernova from General Electric, which later transformed into GE Aerospace

Advertisements

Since the completion of its spin-off, GE Vernova shares have yielded a staggering 163% return, in contrast to the 27% increase observed in GE Aerospace's stock price.

Atmus Filtration Technologies is another prime example, boasting a 51% return since its spin-off from Cummins, while Cummins itself experienced a 33% surge in its stock price post-separationThese instances underscore the potential that spin-offs hold in creating significant shareholder value.

The influence of activist shareholders cannot be overstatedJim Osman, CEO and founder of the Edge Group, emphasizes the growing pressure from aggressive investors as one of the primary catalysts for this trendHe states in an email, “With activist investors increasing their stakes, we expect the number of corporate spin-offs to significantly rise in 2025. This trend will not only reshape industries but also create substantial value for proactive investors with insight into these dynamics.”

A compelling case is exemplified by Honeywell, an industrial conglomerate currently exploring the possible divestment of its aerospace business in response to demands from Elliott Investment Management, an activist shareholder advocating for separation

Advertisements

Bloomberg analyst Karen Ubelhart suggests that spinning off its aerospace division could potentially enhance Honeywell’s enterprise value by as much as $32 billion.