Shares in iQIYI, a Chinese Netflix-style video streaming service controlled by search giant Baidu Inc., fell during its trading debut on March 29. The Beijing-based iQIYI sold 125 million U.S. depositary shares at $18 per share, which was in the middle of its range. The company raised $2.25 billion in its IPO, which was the largest of the year.
Spin-offs provide fertile ground for a variety of investment disciplines. Growth opportunities arise when a mature company divests a subsidiary whose prospects have been masked by the slow growth of the parent. Value investors benefit when the price of a seasoned business — new to the public market — is beat down to attractive levels due to indiscriminate selling.
Altice USA Inc. (ATUS) is engaged in the telecommunications, media and entertainment business. The company operates in two segments: Cablevision and Cequel. The company provides residential and business services across 20 states, digital cable television, high-speed Internet, voice and data products and services. It also provides hyper-local news and programming created specifically for the communities. Its brands include Suddenlink, Optimum, Lightpath, Altice Media Solutions and News 12 Networks.
Numerous studies have demonstrated that spin-offs outperform the overall market by a large margin. Spin-offs, as a group, tend to outperform the broader stock market. During the past 15 years, (through 2017) the Bloomberg U.S. Spin-Off Index returned 999.4%, while the S&P 500 Index returned 203.9%.
Delphi Automotive recently split its stock into Aptiv (APTV) and Delphi Technologies. Delphi Technologies represents the firm’s spun-off powertrain segment while Aptiv encompasses its electrical architecture and electronic lines. Former parent, Delphi Automotive PLC is one of the world’s largest automotive parts makers, churning out a vast array of parts for the auto and commercial vehicle industries.
Certainly, not all spin-offs prove to be attractive investments, but a fair amount of research has shown that investors should not be quick to dump the spin. One reason for the strength of these businesses is the power of independence.
The spin cycle is on high. Returns for many spun-out companies are trouncing the broad market. There are a growing number of large companies starting to question the benefits of scale. “Focus” is the latest boardroom buzzword as CEOs debate the wisdom of managing multiple, often wildly divergent, business units.