The corporate world in the United States is on the brink of a significant transformation, with growing indications that spin-offs are set to increase in frequency by 2025. Corporate spin-offs, where companies separate a portion of their business to form a new independent entity, have long been a strategic tool used to unlock shareholder value. However, recent studies, including research from Trivariate Research, suggest that these corporate splits are poised to become even more prevalent, as firms see the potential to create substantial market value through such actions.

Data from past corporate spin-offs underscores the success of this strategy. Historically, companies that have undergone spin-offs tend to outperform the S&P 500 index by a margin of about 10% over the subsequent 18 to 24 months. The spin-off entities—often smaller, more focused companies—enjoy significant attention from investors, who are drawn to their potential for growth and enhanced operational efficiency. In contrast, the parent companies that remain after the separation typically align their performance more closely with the broader market, reflecting a shift in focus and resources post-split.

The surge in spin-offs is being driven by several key factors, each contributing to an environment where this strategy is increasingly seen as an attractive option for companies and investors alike. For one, the growing success of previous spin-offs has set a precedent that encourages more businesses to consider such corporate restructuring. High-profile cases, such as the separation of PayPal from eBay or the creation of GE Vernova from General Electric, have demonstrated how divestitures can unlock hidden value within large corporations. These examples serve as a blueprint for other firms seeking ways to enhance shareholder returns and streamline operations.

Another major catalyst for the rise in spin-offs is the growing influence of activist investors. These investors, who seek to maximize shareholder value, are increasingly pushing companies to explore the option of spinning off certain business units. Activist shareholders argue that spin-offs can help unlock hidden potential by allowing both the parent company and the new entity to focus on their core strengths, leading to more efficient operations and higher profitability. As activist investors ramp up their involvement in corporate governance, spin-offs are expected to become a more common response to shareholder demands for value creation.

In addition to shareholder pressure, mergers and acquisitions (M&A) activity also plays a significant role in fueling the rise of spin-offs. The ongoing trend of consolidation in various sectors often prompts regulatory bodies to demand divestitures to prevent monopolistic behaviors and maintain competitive market conditions. For example, in the logistics sector, FedEx Corporation has announced plans to divest its freight business in response to evolving regulatory requirements and to position itself for more agile growth in the face of increasing competition.

Adam Parker, the founder of Trivariate Research, highlights the positive correlation between spin-offs and increased market performance, noting that these corporate actions are often indicative of management teams looking for ways to unlock value for shareholders. In 2022, for instance, the Bloomberg US Spinoff Index, which tracks companies that have undergone spin-offs in the past three years, saw an impressive 62% surge, far outpacing the broader market. This performance is further supported by historical data that shows spin-off transactions tend to outperform the market by 12% on average during the first 400 trading days post-completion, despite a slow start in the days immediately following the separation.

Several high-profile spin-offs from recent years further underscore the potential for outsized returns. A notable example is the spin-off of GE Vernova from General Electric (now GE Aerospace). Since its separation, GE Vernova’s stock has soared by an extraordinary 163%, while GE Aerospace—remaining the larger of the two companies—saw a more modest 27% increase over the same period. Similarly, Atmus Filtration Technologies, which was spun off from Cummins Inc., saw its stock appreciate by 51%, outpacing Cummins’ 33% gain since the split. These examples highlight the substantial rewards that can result from spin-offs, both for the newly formed companies and for investors who identify these opportunities early.

The growing pressure from activist shareholders is further emphasized by Jim Osman, the founder and CEO of Edge Group, a firm specializing in special situations research. Osman believes that the combination of activist investor influence and the evolving regulatory environment will lead to a significant increase in corporate spin-offs over the next few years. “As shareholders continue to push for greater value creation, we expect the number of spin-offs to rise dramatically, reshaping industries and offering valuable opportunities for investors who know how to capitalize on them,” Osman said in a recent interview.

A particularly compelling example of the influence of activist investors is Honeywell International Inc., which is reportedly considering the divestiture of its aerospace business amid increasing pressure from Elliott Investment Management, a prominent activist investor. According to Bloomberg analyst Karen Ubelhart, following Elliott’s recommendations could increase Honeywell’s enterprise value by as much as $32 billion, further underscoring the potential benefits of spin-offs for both the companies involved and their shareholders.

As spin-offs continue to gain traction, certain sectors have emerged as particularly ripe for this type of corporate restructuring. Industrial companies, technology hardware firms, and energy providers are among the most active in pursuing spin-offs, with these industries seeing the greatest potential for value creation through strategic divestitures. Trivariate Research has also pointed to specific characteristics that make some companies particularly suited for spin-offs, including high profit margins, robust free cash flow growth, low debt levels, and minimal short-sell ratios. These qualities contribute to the ability of spin-off companies to outperform the market, as they are often more nimble and focused than their parent companies.

However, it is important to note that not all spin-offs are created equal, and some companies may struggle post-separation. Trivariate’s research highlights that, despite the generally strong performance of spin-offs, the remaining companies that emerge from these transactions often underperform the market, particularly in the first year after the split. In fact, companies that possess high-quality metrics prior to the spin-off tend to perform the worst, lagging behind the broader market by an average of 15% in their first year. This phenomenon is a reminder that spin-offs, while potentially lucrative, carry risks and that careful strategic planning is required to ensure long-term success for both the new entity and the parent company.

Looking ahead, the trend of corporate spin-offs is likely to continue reshaping the U.S. corporate landscape. As market conditions evolve, driven by investor activism, regulatory changes, and the pursuit of operational efficiencies, companies will increasingly turn to spin-offs as a means of unlocking value and gaining a competitive edge. For investors, the ability to identify successful spin-off opportunities will be crucial, as these transactions present the potential for significant returns in both the short and long term.

In conclusion, the rise of corporate spin-offs reflects broader shifts in how companies are approaching value creation and shareholder returns. With the support of activist investors and the ongoing evolution of market dynamics, spin-offs are likely to play an increasingly central role in corporate strategies over the next few years. For both companies and investors, staying attuned to this trend will be essential to navigating the future of the U.S. economy and capitalizing on the opportunities that lie ahead.