Goldman Strategists See More US Spinoffs With Companies Squeezed

(Bloomberg) — US companies are set to continue spinning off business units this year in a push to boost margins and increase shareholder value, according to strategists at Goldman Sachs Group Inc.

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US firms announced 44 new spinoffs last year and completed 20, including General Electric Co.’s carve out of its medical-equipment business and Intel Corp.’s spinoff of self-driving technology business Mobileye. Overall, the number of announced spinoffs in the US surged by 33% in 2022, a trend that strategists including David Kostin and Jenny Ma expect to continue.

“Below-trend economic growth coupled with investor focus on corporate profitability means managements should consider spinoffs as a strategy to lift margins and create shareholder value,” the strategists wrote in a note. An elevated cost of capital will also support further spinoff activity this year, they said.

Companies that have been spun out typically outperform the parent firm, Kostin and Ma wrote, citing a study of 361 transactions completed between 1999 and 2020. Still, there is a wide range of outcomes, and only six of 20 spinoffs completed in 2022 outperformed their parent entities since separation, they said.

The carved out companies that have outperformed since 2021 have tended to have lower forward price-to-earnings multiples relative to their parent company, according to the analysis. In the current macroeconomic climate, investors will also gravitate toward those that can show durable margin profiles, they said.

Spinoffs with “greater expected EPS growth and wider margins that trade at a valuation discount likely represent a more attractive investment opportunity compared with owning an index with minimal growth that trades at an expensive valuation,” they wrote.

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