Will the US stock market 迎来 a wave of spin-offs? Historically, companies that split tend to outperform the market

According to Zhitong Finance, a report from Trivariate Research indicates that by 2025, the pace of corporate spin-offs in the United States will accelerate, and historically, newly formed companies will provide substantial returns for investors. Data compiled by Trivariate shows that stocks of companies spun off from existing firms often outperform the average S&P 500 index by 10% in the subsequent 18-24 months. Meanwhile, according to a report released last month, the performance of the remaining entities after a spin-off aligns with the S&P 500 index in the second year following the spin-off.

Several factors are expected to further drive this trend this year: a recent series of successful spin-offs, increasing pressure from activist investors, and a rise in merger and acquisition activities that may necessitate spin-offs to meet regulatory expectations. FedEx (FDX.US) has already announced plans to divest its freight division within the next 18 months.

Adam Parker, founder of Trivariate Research, stated, "The strong performance of spun-off companies can serve as a barometer for management teams seeking successful ways to unlock value."

There is ample evidence supporting the benefits of this initiative. The Bloomberg US Spinoff Index rose 62% last year, consisting of companies that were spun off in the past three years. Data shows that while the performance of spin-off transactions in the first five trading days post-completion is not as strong as that of the so-called remaining companies, over the first 400 trading days, their performance is on average 12% higher than that of the remaining companies.

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

Another example is Atmus Filtration Technologies (ATMU.US), which achieved a 51% return after separating from Cummins Inc. (CMI.US), while Cummins' stock price has increased by 33% since the closing day after the spin-off.

Pressure from Activist Shareholders

According to Jim Osman, founder and CEO of special situations research firm Edge Group, one of the biggest driving factors may be the increasing pressure from activist investors. Osman wrote in an email, "As activist investors ramp up their investments, we expect the number of corporate spin-offs to increase significantly by 2025. This trend will not only reshape industries but also create substantial value for proactive investors who know where to look." Honeywell (HON.US) is a strong example. The industrial group is exploring the divestiture of its aerospace business as it faces calls from Elliott Investment Management for a breakup. Bloomberg analyst Karen Ubelhart wrote, "If Honeywell were to spin off its aerospace division as proposed by activist shareholder Elliott Investment Management, the company's enterprise value could increase by up to $32 billion."

According to Trivariate, the industries most commonly seeking spin-offs are industrials, technology hardware, and energy. The performance of the spun-off entity also depends on the quality of the parent company. Researchers define the quality of the parent company as having high profit margins, growing free cash flow, low debt, and low short interest. Interestingly, Trivariate found that so far, the highest quality remaining entities involved in spin-offs have performed the worst, averaging a 15% underperformance relative to the market in the first year