Goldman strategists predict more US spinoffs with companies squeezed

US COMPANIES are set to continue spinning off business units this year in a push to boost margins and increase shareholder value, strategists at Goldman Sachs Group said.

Last year, US corporates announced 44 new spinoffs and completed 20, including General Electric’s carve-out of its medical-equipment business, and Intel’s Mobileye, a self-driving technology spinoff. 

Overall, the number of announced spinoffs in the US surged by 33 per cent in 2022, a trend that strategists David Kostin and Jenny Ma expected to continue.

They said: “Below-trend economic growth coupled with investor focus on corporate profitability means that managements should consider spinoffs as a strategy to lift margins and create shareholder value.”

An elevated cost of capital would also support further spinoff activity this year, they added.

Spinoffs typically outperform their parent companies, they said, citing a study of 361 transactions completed between 1999 and 2020. Still, there was a wide range of outcomes, and only six of the 20 spinoffs completed in 2022 outperformed their parent entities since separation, they added.

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

Spinoffs with “greater expected earnings-per-share 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”. BLOOMBERG