Corporations are riding a trend: spinning off units into public companies

Corporate America is closing out 2024 with something of a trend: spinoffs.

FedEx announced plans last week to spin off its trucking business into its own, publicly traded entity; Honeywell is exploring doing the same with its aerospace business; in November, Comcast announced that it would create a new company to house its group of cable television networks.

And, earlier in the year, one of the most storied names in U.S. corporate history — General Electric — completed its own breakup into three separate companies.

Overall, more companies are finding reasons to follow that path, and some investors are egging them on.

It’s not necessarily the folks in the C-suite who are pushing to break apart their businesses, said Nell Minow, vice chair at ValueEdge Advisors.

“CEOs love to buy new stuff. I mean, it’s a lot more fun than just figuring out a way to cut costs or develop new products,” she said.

Instead, it’s often activist investors who push for spinoffs, she said.

“Activists who are on the outside, who are looking at the balance sheet, can see that, as they say on Sesame Street, one of these things is not like the other, and it doesn’t belong,” Minow said.

So, say a company runs a freight trucking business, but also a package delivery business and a printing business, which kind of doesn’t belong. 

“The company may actually be more valuable if it wasn’t bundled with those assets,” said Jarrad Harford, a professor at the University of Washington’s Foster School of Business.

A lot of this is happening in industries that are changing quickly, like cable TV and package delivery, said Jay Brown, a corporate law professor at the University of Denver.

“They’re evolving, and they’re reconfiguring from what they were before,” he said. “And so people are trying to reallocate their assets in a way that will allow them to compete more effectively. But it’s a guess, right?”

And those guesses, he said, could prove to be wrong. Not every spinoff works out.

But a recent one really has worked so far: General Electric’s. 

GE Vernova, the new name of the former conglomerate’s energy business, just announced an investor dividend and stock buyback. 

And its competitors have noticed, said Asif Suria, who runs a website and newsletter called Inside Arbitrage.

“So they saw the playbook work, and they said, ‘This is a company in our same space, in industrials, and we could potentially try to do the same thing,'” he said.

One other reason companies might want to pursue a spinoff now: Analysts expect interest rates to remain higher for longer, meaning the cost of debt will stay higher, Suria said.

“Spinoffs are an excellent way of offloading debt, especially to the spun-off company,” he said.

Which can make the balance sheet of the parent company — the one not getting spun off — look a whole lot better.