Corporate breakups surged in 2014—66 spinoffs had been announced as of late October, surpassing the 57 in all of 20131—as shareholders pushed companies to spin parts of their operations off into new independent companies in a bid to increase returns.
The idea is that the parts of some big companies might be more valuable as separate entities than they are when combined in an unwieldy whole. For example, after a spinoff, the new standalone company should be free to focus exclusively on its own business plans, reorganize its management structure and raise its own money.
Recently spun-off companies have outperformed the broader market. The Beacon Spin-Off Index, which tracks the performance of 40 recently spun-off U.S. companies, rose nearly 150% between 2010 and late November 2014. In contrast, the S&P 500® Index was up roughly 90% during the same period.2
How do shareholders hope to benefit? A parent company might execute the spinoff by distributing shares in the subsidiary to its own shareholders. Those shareholders could then keep or sell those shares. A parent company could also sell shares in the new company to the public via an initial public offering.
But while spinoffs may benefit some shareholders, the situation may not be as positive for bondholders. An analysis by S&P Capital IQ found that spinoffs can degrade the credit quality of the parent company by weakening its business or cutting off cash flows.3 Since August 2013, a third of S&P-rated companies that conducted spinoffs have received credit downgrades or credit warnings on their bonds. The S&P analysis also says the recent uptick in spinoffs could lead to additional downgrades.
So, while some shareholders may clamor for spinoffs, bond investors might be less optimistic about the financial health of the parent companies that are left behind.
1S&P Capital IQ, as of 10/20/2014.
2Data as of 11/18/2014.
3“Spin-Offs, on the Rise Again in the U.S., Can Signal Weaker Credit Quality for Parent Companies,” S&P Capital IQ, 10/9/2014.