Spinoffs have been known to unlock value for some businesses by allowing them to focus on their niches rather than being part of a multi-faceted corporation that may not prioritize their specific operations.
However, investors should still be cautious as there are other reasons for spinoffs as well. Some represent attempts by the parent companies to shed dead weight, help get rid of legal liabilities or satisfy regulatory concerns. A spinoff is no guarantee of success or failure – it all depends on the quality of the company and why the spinoff was made.
Earlier this year, I wrote an article detailing five major spinoffs made during the first half of 2020. According to the GuruFocus List of Spinoff Stocks, the biggest spinoffs during the second half of the year were IAC/InterActiveCorp (IAC, Financial), Brookfield Renewable Corp. (BEPC, Financial), Maxeon Solar Technologies Ltd. (MAXN, Financial), Vontier Corp. (VNT, Financial) and Concentrix Corp. (CNXC, Financial). Let's take a look at why these companies were spun off from their parent companies and how likely they are to unlock value for shareholders.
IAC/InterActiveCorp
IAC's spinoff date was July 1, 2020. This separation was rather unique because, as a "parent" company, it actually spun itself off from its "child" company, Match Group (MTCH, Financial), an online dating service company. In that sense, Match is the real spinoff here. The unusual transaction came about because Match had grown to be larger than the rest of IAC's holdings put together.
Commonly known by its acronym, IAC is a media and internet holding company based in New York. It owns a wide variety of brands across 100 countries, including ANGI Homeservices, Care.com, Ask Media Group, Dotdash, Mosaic Group and Angie's List.
As of Jan. 13, shares of Match traded around $155.77 for a market cap of $41.43 billion. In comparison, IAC traded around $197 for a market cap of $17.55 billion. Shares of IAC have gained 84% since the spinoff.
IAC spins off its holdings at a faster rate than most companies, since its components operate separately for the most part and don't really need to be part of a larger corporate umbrella in order to function. In fact, IAC's strategy is to invest in the holdings that it believes have high potential for success, and once it believes those companies have become strong enough to thrive independently and are only being held back by the corporate umbrella, it separates them.
This strategy allows the company to keep its base valuation from getting too high as investors are not as enthusiastic about a collection of companies than they would be for a single company that demonstrates high earnings growth. Once IAC uses a spinoff to unlock value for one of its attractive components, it can then invest the proceeds in new opportunities, and so on.
IAC will undoubtedly continue to use spinoffs to unlock value in the future. The fact that most of them are internet and media companies, with many operating on a software-as-a-service (SaaS) model, means there is high potential for it to successfully use this leverage strategy again.
Brookfield Renewable
On July 30, 2020, Brookfield Renewable was spun off from parent company Brookfield Renewable Partners LP (BEP, Financial). The parent company is one of the world's largest renewable power platforms, owning approximately 19,400 megawatts of capacity and 5,318 generating facilities in North America, South America, Europe and Asia.
Brookfield Renewable does not actually operate separately from its parent company. After Brookfield acquired TerraForm Power in July, it made a special distribution of shares analogous to a unit split that became the new Brookfield Renewable Corp., but both stocks represent common shares of the same underlying company.
As of Jan. 13, shares of Brookfield Renewable Corp. traded around $59.60 for a market cap of $10.22 billion. Shares have gained 108% since the split.
Management hopes the special share distribution will encourage investing in the stock, since it increases the total share count. CEO Sachin Sha commented the following on the merger and spinoff announcement:
"We look forward to completing the merger with TerraForm Power. The transaction is immediately cash accretive and further enhances Brookfield Renewable's position as one of the largest, publicly traded pure-play renewable power businesses globally. We are also excited to be launching Brookfield Renewable Corporation, which provides investors greater flexibility to invest in our business."
While this is a spinoff on paper, the real story here is a merger. The acquisition of TerraForm Power helps Brookfield Renewable solidify its position as one of the world's biggest renewable energy players.
Maxeon Solar Technologies
Solar panel maker Maxeon Solar Technologies spun off from parent company SunPower Corp. (SPWR, Financial) on Aug. 27, 2020. The strategic separation was a clean split that left SunPower with the company's U.S. and Canada operations, while Maxeon owns the rest of the company's global operations.
Maxeon is headquartered in Singapore and has an exclusive DG panel supply agreement with SunPower. It has a customer base of more than 300,000 and operates in the residential, commercial and power plant categories.
On Jan. 13, shares of Maxeon traded around $37.43 for a market cap of $1.25 billion. The share price dropped sharply following the separation but has mostly recovered since then, down only 0.5% in total since the spinoff.
"Now is the right time for this strategic spin-off, allowing both SunPower and Maxeon to invest in key programs to drive their future profitable growth," said Tom Werner, SunPower CEO and chairman of the board. "Solar power is poised for significant growth and now each company is well-positioned to succeed based on specific areas of specialization, technology innovation and economies of scale."
The spinoff is geared toward allowing both companies to focus on development and marketing efforts in their regions of operation rather than being weighed down by a global corporate structure. Both companies continue to cooperate on the development of their next generation of solar panels.
Vontier
Vontier spun off from Fortive Corp. (FTV, Financial) on Oct. 9, 2020. Fortive is an American diversified conglomerate company that owns a wide variety of businesses in two main categories: industrial technologies and professional instrumentation industries.
The Vontier spinoff consists of the company's industrial technologies segment, which focuses on transportation and mobility. Businesses under this umbrella include wheel-service equipment maker Hennessy and fleet management company Teletrac Navman, among others.
On Jan. 13, Vontier's shares traded around $34.39 for a market cap of $5.79 billion. Since the spinoff, shares have gained 1%.
The separation represents a clean break along an already-established division between the company's segments, so it seems likely to be value-accretive for both companies. Fortive President and CEO James A. Lico had the following to say about the spinoff:
"With the successful completion of the Vontier spin-off, both Fortive and Vontier are well positioned to pursue their independent strategic priorities, as they invest to accelerate growth and generate increased value for their employees, customers, shareholders, and communities. We are extremely excited about the opportunities that lie ahead for both companies."
Concentrix
On Dec. 1, Concentrix completed its spinoff from Synnex Corp. (SNX, Financial), an American multinational corporation that provides business-to-business and design-to-distribution services for the IT industry.
Concentrix is a provider of customer experience solutions and technology for businesses. Its focus is on creating "brand experiences" for clients to draw in customers and keep them loyal to the brand by making it stand out from competitors.
On Jan. 13, shares of Concentrix traded around $119.70 for a market cap of $6.19 billion. Since the spinoff, the company's shares have gained 49%.
Concentrix shares had previously been traded on a when-issued basis on the Nasdaq under the symbol "CNXCV" since Nov. 16, allowing investors to trade the right to receive Concentrix shares in the distribution.
"Operating as an independent company will allow us to accelerate innovations and make additional investments that drive higher value for our clients, their customers, and our shareholders," Chris Caldwell, president and CEO of Concentrix, said regarding the spinoff.
Concentrix's services support over 95 Global Fortune 500 clients and over 90 disruptive high-growth clients. It classifies itself as a highly disruptive company focusing on growth, though investors should note that with a cash-debt ratio of 0.02 and an Altman Z-Score of 2.02, it is far more highly leveraged than its parent company, which can sometimes serve as a red flag.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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