Diversified companies continue to look at spin-offs as a way to unlock value for investors. Seven new spin-offs were announced in May (see “May spinners”). Hewlett-Packard Enterprise (HPE), the business services arm of the former tech giant, was the latest high profile company to say it’s spinning off a unit as a way to make itself more valuable.
Medical device maker Varian Medical (VAR), itself a spin-off, also in May announced plans to spin off its imaging business as a stand-alone pubic company. We anticipate about 15 spin-offs will be completed during the next three months, adding to the (12 spin-offs that have been completed year-to-date in 2016 (see “Spun”).
Spin-offs have a history of outperforming the market in their early years. Since 1999, newly liberated companies outperformed the Standard & Poor’s 500 Index by six percentage points in the first two years after being spun from their parent, according to Goldman Sachs. The Bloomberg Spin-Off Index has beaten the S&P 500 handily for a decade (see “Spinners win”). The index tracks, for three years, spin-offs with a market value above $1 billion. The Bloomberg U.S. Spin-Off Index is up 7.75% through the first five months of 2016, more than double the 3.57% return of the S&P 500.
We continue to believe that the spin space will provide lucrative investment opportunities.