Zhitong Finance learned that a Trivariate Research report shows that by 2025, the pace of spin-off of US companies will accelerate, and based on history, newly established companies will bring considerable returns to investors. According to data compiled by Trivariate, stocks of companies spun off from existing companies often outperformed the S&P 500 by an average of 10% over the subsequent 18-24 months. Meanwhile, according to a report released last month, in the second year after the spin-off ended, the performance of the remaining entities after the split was consistent with the S&P 500 index.

Several factors are expected to further drive this trend this year: a recent series of successful spin-offs, increasing pressure from aggressive investors, and increased M&A activity may require a spin-off to meet the expectations of regulators. FedEx Express (FDX.US) has announced plans to divest its freight division within the next 18 months.

Adam Parker, founder of Trivariate Research, said, “The strong performance of the spin-off company can be a barometer for management teams looking for successful ways to unlock value.”

There is ample evidence to support the merits of this initiative. The Bloomberg US Spinoff Index (Bloomberg US Spinoff Index), which consists of companies that have been spun off within the past three years, rose 62% last year. According to the data, although the spin-off did not perform as well as the so-called remaining companies in the first five trading days after completion, they performed an average of 12% higher than the remaining companies in the first 400 trading days.

Last year, the US completed eight spin-offs, including the divestiture of GE Vernova (GEV.US) from General Electric (now GE Aerospace (GE.US)). Since the split was completed, GE Vernova's stock price has achieved a return of 163%, while GE Aerospace's stock price has risen 27%.

Another example is Atmus Filtration Technologies (ATMU.US), which achieved a 51% return after splitting from Cummins (CMI.US), and Cummins shares rose 33% from the closing day after the divestment.

Pressure from aggressive shareholders

According to Jim Osman, founder and CEO of special circumstances research firm Edge Group, one of the biggest drivers is probably increasing pressure from aggressive investors. In an email, Osman wrote: “As activist investors step up their investments, we expect the number of corporate spin-offs to increase significantly in 2025. This trend will not only reshape the industry, but will also create significant value for active investors who know where to look.”

Honeywell (HON.US) is a powerful example. The industrial group is exploring divestment of its aerospace business as it faces calls for a spin-off from Elliott Investment Management (Elliott Investment Management). Bloomberg analyst Karen Ubelhart wrote, “If Honeywell divests its aerospace division as proposed by activist shareholder Elliott Investment Management, the company's corporate value will increase by up to $32 billion.”

According to Trivariate, the industries companies most often seek to spin-off are industrial, technology hardware, and energy. Post-spin-off performance also depends on the quality of the parent company. Researchers define the quality of parent companies as high profit margins, increased free cash flow, low debt, and low shorting rates. Interestingly, Trivariate found that the highest-quality remaining entities involved in the spin-off performed the worst to date, falling behind the market by an average of 15% in the first year.