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Spin-offs that outperform the S&P 500 boost the case for break-ups in corporate America.

In 2025, the rate of spinoffs in the US is expected to quicken, and if historical data is any indication, the newly created companies are poised to deliver solid returns for investors. According to a report from Trivariate Research, shares in companies that have been spun off from existing firms tend to outperform the S&P 500 by an average of 10% over the subsequent 18-24 months.

A Strong Historical Track Record

The data compiled by Trivariate shows that companies that have undergone spinoffs in the past have consistently outperformed their counterparts. While it is true that these companies underperform in the first five days following the spinoff, they eventually outperform them by an average of 12% over the subsequent 400 trading days.

Recent Successful Spinoffs

In recent years, a string of successful spinoffs has added to the momentum behind this trend. One notable example is GE Vernova Inc., which was separated from General Electric Co. and now operates as GE Aerospace. Since its separation, Vernova’s shares have posted a 163% return, while GE Aerospace stock has gained 27%.

Activist Pressure: A Key Driver

Another factor expected to contribute to the increase in spinoffs is the rising pressure from activist investors. Jim Osman, founder and CEO of special situations research firm The Edge Group, believes that this trend will not only reshape industries but also create substantial value for proactive investors who know where to look.

Honeywell International Inc.: A Potent Example

One notable example of an industrial conglomerate exploring a separation is Honeywell International Inc. The company is considering separating its aerospace business as it faces calls from activist shareholder Elliott Investment Management for a breakup. According to Bloomberg Intelligence, Honeywell could boost its enterprise value by up to $32 billion if it cleaves off its Aerospace unit.

Sectors Most Likely to Pursue Spinoffs

The sectors whose companies most often pursue spinoffs are industrials, technology hardware and energy, according to Trivariate Research. The quality of the parent company also plays a significant role in determining the success of spinoffs. Companies with strong margins, free cash flow growth, low debt and low levels of short interest tend to perform better.

The Performance of Remaining Companies

Interestingly, Trivariate found that the highest-quality remaining companies that engaged in spin-offs were by far the worst performing, lagging the market by 15% on average over the first year. This suggests that while spinoffs can be a successful strategy for unlocking value, it is essential to carefully evaluate the performance of both the spun-off and remaining companies.

Conclusion

The accelerating pace of spinoffs in the US presents opportunities for investors who are proactive and knowledgeable about this trend. As Adam Parker, founder of Trivariate Research, notes, "The strong performance of spinoff companies can serve as a barometer for management teams who are looking for successful ways to unlock value."

What’s Next?

With the increasing pressure from activist investors and expectations that mergers and acquisitions activity may require separations to satisfy regulators, the trend is likely to continue in 2025. Companies considering spinoffs should carefully evaluate their options and consider the potential benefits of this strategy.

Additional Insights

  • Bloomberg US Spinoff Index: This index, which comprises companies that have been spun off within the past three years, gained 62% last year.
  • GE Vernova Inc.: The company’s shares have posted a 163% return since its separation from General Electric Co., while GE Aerospace stock has gained 27%.
  • Atmus Filtration Technologies Inc.: The company’s shares posted a 51% return after its separation from Cummins Inc.

About Trivariate Research

Trivariate Research is a research firm that specializes in analyzing spinoffs and their impact on investor returns. The company’s data shows that companies that have undergone spinoffs tend to outperform the S&P 500 by an average of 10% over the subsequent 18-24 months.

Sources:

  • Trivariate Research
  • Bloomberg Intelligence
  • The Edge Group