M&A and IPOs Are Out; Spinoffs Are In

Total spinoffs have already topped last year’s figures and that number looks set to keep rising in the following months.

Initial public offerings (IPOs) are down a staggering 82% from a year ago in the total number of deals. Similarly, the total volume of mergers and acquisitions (M&As) is down a hefty 34% year over year.

But there is one type of deal that has been on the rise—spinoffs. According to Wall Street Horizon, total spinoffs have already topped last year’s figures, with 40 major spinoffs by the end of the third quarter, the greatest number since 2016; and that number looks set to keep rising in the following months.

These corporate breakups, or demergers, occur when a parent company creates a separate, independent company from one of its divisions by distributing shares of the new subsidiary to its shareholders. It is generally because the subsidiary has become too large to stay within the parent’s management or to unlock value. The trend has gained steam due in part to higher borrowing costs. Although the jury is still out in GE’s announced spinoff into three separate divisions, for example, rating agencies such as Fitch and Moody’s said the deal would likely help tamp down GE’s ballooning debt.

AT&T announced its WarnerMedia division spinoff in April of this year. This gave shareholders a part of the resulting publicly traded Warner Bros. Discovery for each share of AT&T they held at close. Similarly, GlaxoSmithKline’s Haleon spinoff in July forged a new global pharmaceutical powerhouse.

A spinoff may also take place because the division has become a liability. Recall 3M’s announced spinoff of its food safety and healthcare businesses amid unprecedented legal liability and a slumping share price. The food safety segment was combined with food safety giant Neogen in a deal valued at $9.3 billion.

Unlike IPOs, which pose a significant risk to investors, spinoffs are usually tried-and-true companies with working business models, according to Jim Osman, founder of The Edge Group, based in the Greater New York area. “New companies via spinoff offer extreme value in bear markets,” he says.